Document ofThe World Bank

Report No: 19226

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED LOAN OF US$16 MILLION

AND A

PROPOSED CREDIT OF SDR22.2 MILLION (USD$ 30 MILLION EQUIVALENT)

TO THE

PEOPLE'S REPUBLIC OF CHINA

FOR A

FOURTH RURAL WATER SUPPLY AND SANITATION PROJECT

May 10, 1999

Urban Development Sector UnitEast Asia and Pacific Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective April 1998)

Currency Unit = Renminbi$1.00 = Y8.3Y1.0 $0.12

FISCAL YEAR

January 1- December 31

WEIGHTS AND MEASUTRES

m = Meter (= 3.28 feet)km = Kilometer (= 0.62 miles)

I = Liter (=0.264 US gallons)lcd = Liters per capita per daym = Cubic meter or ton of water (284 US gallons)

ABBREVIATIONS AND ACRONYMS

AWP - Annual Work PlanCAS - Country Assistance StrategyCNCCCITC - China National Chemical Construction Company International Tendering

CompanyCPO - County Project OfficeERR - Economic Rate of ReturnFRR - Financial Rate of ReturnICB - International Competitive BiddingMOF - Ministry of FinanceNCB - National Competitive BiddingNPO - National Project OfficeNPHCC - National Patriotic Health Campaign CommitteeNPV - Net Present ValueNRWS - National Rural Water Supply Project (Cr. N0270-CHA)OED - Operations Evaluation DepartmentPHRD - Policy and Human Resources Development FundPIP - Project Implementation PlanPMO - Project Management OfficePPO - Provincial Project OfficeQCBS - Quality-and Cost-Based SelectionRAP - Resettlement Action PlanRWS Rural Water Supply Project (Cr. 1578-CHA)RWSS - Rural Water Supply and Sanitation Project (Cr. 2336-CHA)SOEs - (I )Statements of Expenditures (2) State Owned EnterprisesSDPC - State Development Planning CommissionUNDP - United Nations Development ProgramUNICEF - United Nations Children's FundVAT - Value Added TaxWAs - Withdrawal ApplicationsWSP - UNDP/World Bank Water and Sanitation ProgramWTP - Willingness to Pay

Vice President: Jean-Michel Severino, EAPCountry Director: Yukon Huang, EACCFSector Manager: Keshav Varma, EASURTask Team Leader: George Plant, EACCF

CHINAFOURTH RURAL WATER SUPPLY AND SANITATION PROJECT

CONTENTS

A Project Development Objective ................................................................. 3

1. Project development objective ................................................................. 32. Key performance indicators ................................................................. 3

B Strategic Context ................................................................. 3

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project ........32. Main sector issues and Government strategy ................................................................. 33. Sector issues to be addressed by the project and strategic choices .................................5

C Project Description Summary ................................................................. 6

1. Project components ................................................................. 62. Key policy and institutional reforms supported by the project .......................................73. Benefits and target population ................................................................ 74. Institutional and implementation arrangements .............................................................8

D Project Rationale ................................................................ 12

1. Project alternatives considered and reasons for rejection ............................................. 122. Major related projects financed by the Bank and/or other development agencies ........ 123. Lessons learned and reflected in the project design ...................................................... 134. Indications of borrower commitment and ownership ............................... .................... 155. Value added of Bank support in this project ................................................................ 15

E Summary Project Analysis ................................................................ 16

1. Economic ............................................................... 162. Financial ............................................................... 163. Technical ............................................................... 184. Institutional ............................................................... 195. Social ............................................................... 196. Environmental assessment ............................................................... 207. Participatory approach ............................................................... 21

F Sustainability and Risks ............................................................... 22

1. Sustainability ............................................................... 222. Critical Risks ............................................................... 223. Possible Controversial Aspects ............................................................... 24

G Main Loan Conditions ............................................................... 24

1. Effectiveness Conditions ............................................................... 242. Other ............................................................... 24

ii

H Readiness for Implementation ........................ 25

I Compliance with Bank Policies ........................ 26

Annexes

Annex 1. Project Design Summary .27Annex 2. Project Description .30Annex 3. Estimated Project Costs .37Annex 4. Economic Analysis .38Annex 5. Financial Summary .46Annex 6. Procurement and Disbursement Arrangements .48Table A. Project Costs by Procurement Arrangements .51Table C. Allocation of Loan Proceeds .52Table D. Schedule of Disbursements .53

Annex 7. Project Processing Schedule .60Annex 8. Documents in the Project File .61Annex 9. Statement of Loans and Credits .62Annex 10. Country at a Glance .66

Map

CHINA

Fourth Rural Water Supply and Sanitation Project

Project Appraisal Document

East Asia and Pacific RegionCountry Operations Division

Date: April 16, 1999 Team Leader: George N. PlantCountry Manager/Director: Yukon Huang Sector Manager/Director: Keshav VarmaProject ID: 57352 Sector(s): WR - Rural Water Supply & SanitationLending Instrument: Specific Investment Loan (SIL) Theme(s):

Poverty Targeted Intervention: Yes

Project Financing DataZ Loan [E Credit Li Grant CI Guarantee O Other (Specify)

For LoanslCredits/Others:Amount (US$m) 46 (IBRD Loan: 16, IDA Credit: 30)Proposed Terms: O To be defined LI Multicurrency N Single currency U.S. dollars

151 Standard Variable El Fixed N LIBOR-basedGrace period (years): 5; 10Years to maturity: 20; 35Commitment fee: 0.75; 0.5%Service charge 0; 0.75%Front end fee on Bank loan 1.00%

Governinent 23.00 0.00 23.00IBRD 4.00 12.00 16.00IDA 7.40 22.60 30.00BENEFICIARIES 23.00 0.00 23.00

| Total: 57.40 34.60 92.00

Borrower: People's Republic of ChinaGuarantor:Responsible agency:Ministry of Health

Implementing agency(ies):National Patriotic Health Campaign Cornmittee, China Water Supply and Sanitation National Project OfficeAddress: 17 Government Street

-Changping CountyPeople's Republic of China

Contact Person: Mr. Zhang Yiren, Standing Deputy DirectorTel: (86-10) 6974-4468 Fax: (86-10) 6974-4437 Email:

Estimated disbursements ( Bank FY/US$M):

Annual 6.30 8.40 10.80 10.60 6.70 3.20

Cumulativel 6.30 | 14.70 | 25.50 | 36.10 | 42.80 | 46.00

Project implementation period: July 1999 to December 2004Expected effectiveness date: 09/15/99 Expected closing date: 06/30/2005

OCS PAD Form: October 9, 1998

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A: Project Development Objective

1. Project development objective: (see Annex 1)

The proposed project aims to reduce the time and cost for people in poor rural areas to obtain clean, safewater supply, while improving related sanitation and health behaviors through education and pilotinvestments. The principal objective of the project is to provide access to safe, conveniently located waterto 3.1 million poor rural people in Anhui, Fujian, Guizhou, and Hainan provinces, and to improve relatedwater and sanitation practices. A supporting objective is to provide the water at the lowest possible costand to ensure its sustainability through good maintenance and accounting practices.

2. Key performance indicators: (see Annex 1)

1. Number of villagers newly served by project-supplied water meeting national rural water qualitystandards, with the goal of serving 3.1 million over five years;

2. (a) Number of sanitary latrines constructed in villages in the project counties in addition to the schooland household demonstration latrines constructed in each village under the project, and (b) percentage pointimprovement compared to the baseline period in key water-related health behaviors;

B: Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: R98-107 Date of latest CAS discussion: 05/28/98

The China Country Assistance Strategy highlighted human development as one of the five major themes inBank support for China's development. Within that theme, poverty reduction plays a major program role.The poverty reduction program seeks to increase the resources controlled by the poor, be these incomegenerating (such as improved agricultural land), contributing to future productivity (education), orprotecting physical well being (health). Improving rural water and sanitation meets several of those goals.It typically releases labor for other purposes, can itself be a productive input, and by lowering pollutant andpathogen intake by the poor, helps protect their health.

2. Main sector issues and Government strategy:

In the past decade, China has made significant gains in rural water supply. Between 1985 and 1997, thenumber of rural residents with convenient access to improved water has more than tripled, to over 848million, or 88.9 percent of China's 954 million rural people. Of these, approximately 407 million people(48 percent of those with access to improved water) presently drink piped water. The remaining 441million (52 percent of those with access to improved water) use a variety of other sources, includinghandpumps, shallow and deep wells, and rainwater collectors. The preference of Chinese governmentalagencies is for the development of piped systems because of the added convenience and the ease ofcontrolling water quality.

Having access to an improved water source, however, is not equivalent to having access to safe water.While almost all piped water systems meet the government's standards for safe water quality, the same isnot true for hand pumps and other systems. Only about 95 million beneficiaries of non-piped systemsenjoy access to safe water. The remaining 346 million rural residents use water which is improved, butnevertheless still does not meet the standards of safe water.

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Therefore, despite recent progress, more than 450 million rural Chinese continue to suffer from unsafe orinsufficient water supplies. About 76% of these are individuals having access to improved water whichdoes not meet the quality of safe water, while the remaining 24% lack access to any improved water source.Both of these groups face problems such as water sources with high pathogen loads due to fecal or othercontamination; water with high levels of naturally occurring fluoride, arsenic, or salts; growing industrialand agricultural chemical pollution; and seasonal water shortages.

In China, as in other countries, the lack of safe water correlates highly with poverty. Also positivelycorrelated with poverty are behaviors that worsen water-related disease. Examples include failure toprotect water sources from contamination, to boil water before drinking, or to wash hands after using thetoilet and before preparing or eating food. As a result, many poor rural people suffer from commondiarrheal diseases and helminth infections and, more rarely, dysentery, hepatitis, typhoid and cholera.

To maintain momentum gained during the United Nations "International Drinking Water Supply andSanitation Decade" (1981-90), in 1991, China set 1995 rural water supply goals at: 35 to 50 percentcoverage of drinking water meeting international quality standards, including 35 to 40 percent of ruralresidents receiving piped water supplies. Both goals were met and even more ambitious goals establishedfor 2000. In its Ninth Five-Year Plan, the government announced its targets of providing piped watersystems for 50% of China's rural population, and of providing safe water for 85% of all rural residents and65% of those residing in China's poorest rural areas by 2000.

However, China differs from many other developing countries in that there is not a history of the centralgovermment providing large subsidies for the financing of rural water supply and sanitation. Instead, thereis greater emphasis on self-reliance with rural people using their own contributions and resources toimprove their water supply. This financing structure causes poor rural areas to accurately match theirability to pay with the proper type of systems and level of service. As a result, China is held up as a modelfor other developing countries. Support for capital costs for water supply is partially provided by the localand/or provincial government. However, this support cannot reach all poor rural areas, and multilateraland bilateral assistance is welcomed by the government.

Health problems caused by the lack of safe water are exacerbated by poor sanitary conditions in ruralChina. Traditionally, Chinese households collect human waste and transport it to the fields for use asfertilizer, often without further treatment. This practice will undoubtedly continue. The main objectives ofsanitation improvements are therefore to improve the standard of latrines and to make reuse practices morehygienic. By 1997, 90 percent of rural households had some sort of household latrine, but most of thesefacilities are rudimentary at best: they provide temporary storage of wastes and are unprotected from fliesand other insect vectors of disease transmission. Only 29 percent of the rural population use "sanitary"latrines, usually defined as latrines with full walls and roof, odorless and insect-free; an additional 27percent, primarily in county towns, have access to composting latrines that promise high rates of pathogendestruction. The availability of public and school latrines is low, and they rarely meet the "sanitary"standard.

In recent years, China has made substantial progress in addressing sanitation issues. Since 1995, thenumber of households with "sanitary" latrines has nearly doubled. In the Ninth Five-Year Plan, thegovernment announced the ambitious goal of establishing "sanitary" latrines for 40% of the ruralpopulation by 2000. Until recently, efforts by the National Patriotic Health Campaign Committee(NPHCC) to expand the use of improved rural latrines have been decentralized, with most improvementsleft up to individual provinces or townships.

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Nevertheless, the government has made a concerted effort to promote good health-related behaviors. Inmost rural areas, a network of NPHCC workers, Women's Federation representatives, Youth Leagues,local epidemic prevention stations, and schools have led health education campaigns encouraging a widearray of hygienic behaviors. That work, combined with a high literacy rate (even in poor areas), has led towidespread knowledge of many basic health behaviors, such as the importance of drinking boiled water.

However, actual behavioral change has been slow to follow, especially in poor areas where fuel may bescarce and understanding of the link between raw water or unwashed hands and diarrhea is tenuous. Thus,the problem is more one of the effectiveness of health messages than of their dissemination: healtheducation in most rural areas provides little concrete information to link hygienic behavior to improvedhealth, and most provinces still lack specialized health education training.

As a result, significant disparities exist between poorer and wealthier rural counties, both among and withinprovinces in China. While a number of wealthier and middle-income rural counties have experiencedtremendous health-related benefits as a result of improvements in water supply and sanitation, poorercounties with more limited resources have yet to receive similar benefits and still require additional supportin order to carry out the changes necessary for improved health gains.

3. Sector issues to be addressed by the project and strategic choices:

This project aims to complement China's efforts in improving rural water supply and sanitation and buildon previous Bank Group sector experience, by providing financing to 27 counties in 4 provinces for watersupply, sanitation and health education, and project management. It adopts a linked approach in whichphysical investnents in water supply are combined with efforts in sanitation and health education, andefforts in project management, in order to maximize the benefits in terms of time, cost, and increasedproductivity gained from improved water supply. An IDA credit of $30 million and IBRD loan of $16million will make up 50 percent of the project's total investment of $92 million; the other 50 percent will beprovided by provincial and local governments, and by the individuals benefiting from the project.Ultimately, most of the costs of the project will be borne by individual beneficiaries, through capital andin-kind contributions and through water tariffs that finance loan repayment.

This project addresses the following three key issues: 1) expansion of safe water supply in poor rural areas;2) improvement of existing efforts in sanitation and health education; and 3) strengthening of the projectmanagement capacity. The strategic choices involved in each are discussed below:

Water Supply. As discussed earlier, over 450 million rural Chinese still lack access to safe water supply.This project would alleviate the problems of 3.1 million individuals by providing safe water supply systemswhich are sustainably financed. In recent years, Chinese governmental agencies have shown a heavypreference for the development of piped systems in many rural areas. Of the total rural population that iscurrently adequately served with safe water, over 80 percent get their water through piped systems.Although construction and maintenance costs per person for piped systems are often higher than for handpumps or similar facilities, government officials prefer piped systems when financing can be arrangedbecause of the added convenience and the ease of controlling water quality. However, as long as adequatemeasures are taken to protect the sources, handpumps, wells, and rainwater collectors may also be used toprovide safe drinking water. Handpumps often serve communities where population is sparse and/orground and surface water is scarce; rainwater collectors are primarily used in mountainous regions, whererainfall is plentiful, but access to surface water is difficult. One key concern is therefore the nature of thewater supply system itself. A second is the overall size and capacity of the individual system. This projectwill ensure that village input is sought in both regards, when determining the appropriate scheme for water

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supply for each individual sub-project. Responsibility for the management of the water system will lie withthe village(s) and/or township(s), depending on the overall complexity of the system.

Sanitation and Health Education. International experience has shown that promotion of sanitation andhealth education, in conjunction with improvements in rural water supply, raises the overall impact of theproject. For this reason, sanitation and health education efforts will be incorporated into this project, aswas also the case with the second and third rural water supply projects in China. As mentioned earlier,existing efforts often fail to foster effective understanding of the link between certain hygienic behaviorsand improved health. This project will focus on constructing very specific health messages and carefullytargeting the messages' audience, rather than delivering general injunctions to behave well.

Most poor rural areas in China are also in need of physical improvements in sanitation. Improvementswhich increased the pathogen kill rate would have positive impact on overall health. However, the costassociated with construction of a "sanitary" and/or composting latrine are high enough to place them out ofthe reach of most villagers in poorer counties. Moreover, while some positive social externalities can beobtained from construction of improved latrines in private households, it is not clear that these are largeenough to justify the substantial subsidies necessary to finance such sanitation improvements. This projecttherefore focuses more on raising the awareness of the benefits of improved sanitation by construction ofdemonstration latrines in village schools and in three households per project village, and will provideinformation to households on design alternatives and their costs through the health and hygiene educationprogram.

Project Management. Finally, efforts will need to be made to increase the capacity of the various projectoffices to provide services to beneficiary villages. Project office staff will need to obtain training in variousproject management skills. Efforts will also need to be made to determine effective strategies for conveyingsanitation and health education messages and for inducing actual behavioral change.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The project will comprise of the following for each of the three main project components:

Water Supply: Provision of safe water, suitably financed, to poor commnunities currently lacking suchsupplies. This will include both piped as well as non-piped systems (i.e. handpumps and rain catchmnents).Also, in order to ensure low-cost operation and project sustainability, the project will provide support fortraining of water system manager(s), operator(s), and accountant(s). Users will be expected to pay for thefull cost of the water, net of government investment.

Sanitation and Health Education: Assistance to ongoing rural sanitation and health education efforts.This component would work with primary school teachers, village doctors, Women's Federationrepresentatives, and public health systems in their efforts to imnprove water use and sanitation practices inthe villages. It would support demonstration programs to increase use of improved latrines; the preparationof health education messages aimed at expanding the adoption of improved sanitation and hygiene practicesamong the target beneficiaries, primarily housewives, school-aged children and decisionmakers inhouseholds; and training of health education specialists in delivery of those messages.

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Project Management: Support to increase project office capacity to provide services to beneficiaryvillages. This would include surveys and research on effective strategies to expand adoption of improvedsanitation and convey health messages. It would encompass training in project management skills such asprocurement, water supply technologies, water quality protection, and health message delivery.

A summary of the costs of each of these components is listed below:

Indic~~~~~~tIv~~~~ %AofComponen -iSetorh t % i f fina' i ng 8ank-

--- _ _- _._._._:--:_ _._-__ _:_:-_:__ _ _ M) T o: J L fn a ncin gWater Supply 74.20 80.7 40.90 88.9Sanitation and Health Education 7.30 7.9 3.70 8.0Project Management 4.90 5.3 1.20 2.6

Total Project Costs 86.40 93.9 45.80 99.6Interest during construction 5.40 5.9 0.00 0.0

Front-end fee 0.20 0.2 0.20 0.4Total Financing Required 92.00 100.0 46.00 100.0

2. Key policy and institutional reforms supported by the project:

No key reforms, beyond those identified in the third project, will be necessary in this project, since thenecessary policy and institutional arrangements have already been established in the Bank's three previousrural water supply projects in China --Rural Water Supply (RWS) Project (Cr. 1578-CHA), Rural WaterSupply and Sanitation (RWSS) Project (Cr. 2336-CHA), and National Rural Water Supply (NRWS)Project (Cr. N027-CHA).

3. Benefits and target population:

The project investment strategy targets benefits on poor villages, while seeking a positive net present value(NPV) of investments. Because economic demand for safe water is positively correlated with income, NPVfrom private water demand would have been maximized by targeting unserved, yet high-income, villages.Instead, the project strategy recognizes that important public health and social welfare externalities are notcaptured in private demand. Because of concerns regarding these externalities, the project centers onobtaining positive, though not necessarily maximized, system NPVs, and on having systems yield adequatereturns to ensure project financial sustainability.

Based on case studies in earlier, similar China projects, private demand for the new system derivesprimarily from time savings in fetching water. However, improved water supply has been shown to have abroad array of other benefits such as reducing waterborne diseases and providing an input to production.Previous rural water projects in China have shown that project investments in rural water supply and inbetter health and sanitation behaviors result in significant improvements in the health of many ruralresidents. An international literature review of similar projects has shown that moving to safe waterreduced diarrheal morbidity by 16 percent, and substantially increased water quantities reduced morbidity25 percent, with a joint effect of 37 percent if both conditions were met. Hygiene education also offersdocumented improvements in health outcomes. The Implementation Completion Report for the Bank's firstrural water supply (RWS) project (Cr. 1578-CHA) reported sharp declines in morbidity of dentalfluorosis among children, in dysentery and in water-borne diseases in nearly every project county, as wellas substantial savings in medical expenditures incurred by households.

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An operating financial covenant requiring that water tariffs cover all operations and maintenance costs andthe greater of (a) interest charges and depreciation or (b) debt service, combined with a 25 percent initialvillager capital contribution, serves as a key decision variable for village participation in the project. Thecorresponding tariff is estimated during feasibility studies and villagers choose whether or not toparticipate, and choose among system alternatives, based on those estimated costs. The tariff alone meetsthe financial sustainability requirement and would yield at least a 3 percent economic rate of return (ERR)even in the absence of consumer's surplus. Although the investment-decision rule faced by the communityimplies a minimum expected positive ERR, it does not automatically follow that consumer's surplus wouldbe sufficient to raise the ERR above the 12 percent discount rate used for Bank Group China projects,hence yield a positive NPV. Actual project consumer surplus will vary by village, and indeed by season fora given village, and be highly dependent on the cost of alternative supplies. Where alternative supplies arecurrently available at a slightly higher economic cost than those from the proposed project, consumersurplus will be low. However, villages with such alternative supplies are unlikely to bid for the project, forthey face a relatively high risk of facing negative net benefits from project investments. The positiveexternalities associated with improved public health and social welfare, although not explicitly estimated,reinforce the expectation of a positive NPV from the investments in safe water.

4. Institutional and implementation arrangements:

Implementation Timetable.Past Bank rural water supply projects in China have focused on building small, primarily piped watersystems designed to satisfy an estimated 15 year demand. Total project implementation time would beabout 5 years. Approximately 10-15% of the water systems will begin construction in the first and fifthyears, with higher proportions falling in the middle years. Based on experience under the NRWS project(Cr. N027-CHA), each year's implementation cycle begins with consultations and village-level feasibilitystudies and the development of procurement lists; these annual work plans are consolidated at the nationallevel and submitted to IDA/IBRD for review in the fourth quarter of each calendar year, for constructionbeginning the first quarter of the following year. This arrangement has proven quite satisfactory under theNRWS project, and allows ample time for discussion on any issues that may arise between the Bank andthe borrower.

Project supervision would monitor impact with respect to the objectives and focus on key sector issues suchas beneficiary participation in system design, water plant operator and accountant training, andsocioeconomic and health impacts of the project. Bank Group experience with supervision of the RWSSproject (Cr. 2336-CHA), which like the proposed project covers a large number of counties, suggests thatsupervision would require about 85 staff-weeks over the life of the project, of which about 60 staff-weekswould be in the field. The Bank resident mission will provide initial review of procurement actions. Moreintensive supervision would be required during the first three years of the project, during which time projectcounties would gain experience with new means of beneficiary participation and national and internationalprocurement. Supervision would be provided by financial analysts, water systems engineers, health andsanitation education specialists, and other specialists as needed. Assurances were obtained at negotiationsthat a mid-term review, to be undertaken no later than June 1, 2002, will review progress in meetingproject objectives, as reflected by the monitoring indicators. The review will identify any changes neededto meet those project objectives, including but not limited to reallocation offunds and commitment ofadditional counterpart funds. Also, assurances were obtained at negotiations that the NPO will (i)prepare, not later than six months after the Closing Date, or such later date to be agreed with the Banka plan for the future operation of the project; and (ii) afford the Bank a reasonable opportunity toexchange views on said plan.

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Implementing Agencies:The responsibility for project management and implementation is divided among national, provincial andcounty levels. At each level, Leading Groups will be established to provide policy guidance and advice ofan intersectoral nature. Their responsibilities include: (a) formation and staffing of project offices; (b)oversight of project offices; (c) resolution of policy issues that arise during project implementation; and (d)coordination of project issues across project related government bureaus. The National Leading Group isheaded by the Minister of Health. Provincial Leading Groups are headed by standing vice-governorsresponsible for health matters, with at least two bureau directors as members. County-level LeadingGroups are headed by county magistrates and such bureau directors as the magistrate deems important toproject execution.

Descriptions of the composition and the specific implementation responsibilities for the project managementoffices (PMO) at each level are as follows:

National Project Office. The National Project Office (NPO), which was established to manage the RWSSProject, is attached to the Ministry of Health. Its working site is part of the China Rural Water SupplyTechnical Center, which provides logistical support to the NPO. The NPO has a staff of 20, including onedirector, one deputy standing director, one deputy director, three water supply engineers, four healtheducation and sanitation specialists, three accountants, two procurement officers, one interpreter, and fourstaff members for general affairs. The NPO is responsible for overall project design, general projectguidance to Provincial Project Offices (PPO) and County Project Offices (CPO), and monitoring of projectprogress and quality. Specific responsibilities include:

(a) Design Review: Assurances were obtained at negotiations that the NPO wouldappraise, using agreed criteria, all water supply investments with an estimated totalinvestment above Y 3. 0 million for the quality of their engineering andfinancialpreparation and their overallfeasibility. Procurement ofproject-related works wouldnot commence prior to successful NPO appraisal. In addition, the NPO will be expectedto conduct site reviews of not fewer than 8 of the largest provincial projects in any givenyear.

(b) Procurement: The NPO will formulate, lead, and monitor all International CompetitiveBidding (ICB) procurement of goods.

(c) Agreements: The NPO will execute all agreements related to the project and will ensurecompliance with regulations applicable to the project.

(d) Baseline Surveys: The NPO will develop and oversee the carrying out of the projectbaseline surveys. Assurances were obtained at negotiations that the provinces willcomplete the baseline surveys for villages receiving new water supplies in 2000 andsubmit them to the NPO no later than December 1, 1999. The NPO shall consolidateand analyze those surveys, submitting them to the Bank no later than January 1, 2000.

(e) Training: The NPO will be responsible for organizing and implementing trainingprograms at the national level.

(f) Sanitation and Health Education The NPO will be responsible for the development of

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health education materials.

(g) Project Reporting and Annual Work Plan: The NPO is responsible for consolidation ofprovincial project reports and for mandatory progress reporting to the World Bank.Assurances were obtained at negotiations that a comprehensive project Annual WorkPlan (A WP) for the following year would be prepared and submitted to the Bankforreview and approval no later than November 30 of each year.

(h) Accounts and Audits: The NPO will prepare a national consolidated account of projectexpenditures, to be submitted to the Bank no later than 6 months after the end of the fiscalyear. The Project Implementation Plan (PIP) details NPO audit responsibilities.

Provincial Project Offices. The PPO staff are drawn from such provincial departments as planning,finance, water conservancy and power, agriculture, urban construction, tax, and patriotic health campaigncommittee offices. A director and from 12 to 16 technical, financial and operational staff constitute thePPOs. The PPOs are responsible for organization, direction and supervision of the implementation ofcounty-level projects, and for quality of project design and management at the provincial level:

(a) Design Review: Assurance were obtained at negotiations that the PPOs would appraise,using agreed criteria, all investments with an estimated total investment above Y 0.5million and not exceeding Y 3. 0 million for the quality of their engineering and financialpreparation and their overallfeasibility. Within the mandatory review limits,procurement ofproject-related works would not commence prior to successful PPOappraisal. In addition, PPOs will be expected to conduct site review of no fewer than 20projects per year, including at least two projects below the mandatory review limit size.

(b) Procurement: PPOs will arrange for the formulation of annual ICB goods procurementlists, and subsequently, for the acceptance and distribution of goods received under ICBprocurement. They will manage procurement of civil works contracts with an estimatedvalue of more than $100,000.

(c) Training: PPOs will be responsible for planning and execution of the provincial-leveltraining program. They will lead the training for the county health education programs,and will assist the NPO in the design of health education materials.

(d) Project Reporting and Annual Work Plans: PPOs will consolidate all investmentimplementation information and prepare monitoring reports to be submitted to the NPO,for further consolidation and submission to the Bank. Assurances were obtained atnegotiations that provincial project A WPs for the followingyear would be prepared andsubmitted to the NPO for review and approval no later than October 15 of each year.

(e) Accounts: PPOs will prepare consolidated accounts of provincial project expenditures, tobe retained at the PPO for mission review. They will carry out an annual review of allwater system and county-level audits ensuring that counties act on audit findings.

County Project Offices. The CPOs work under the guidance of county-level Leading Groups and have 12to 15 staff drawn from the same range of technical backgrounds as the provincial project offices. TheCPOs will include qualified construction supervision staff and have recourse to county-level quality

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assurance offices when additional supervisors are needed The CPOs are responsible for project planning atthe county level, including design, construction and supervision of water supply investments at thetownship and village level:

(a) Design Review and Supervision: The CPOs have responsibility for approval of designswith investment cost less than Y 0.5 million. Designs are completed only after feasibilitystudies in which villages participate. The village committee must formally approve theconcept to be developed. Where CPOs lack sufficient supervisory expertise, they willcontract local construction quality assurance offices to augment that capacity. Assuranceswere obtained at negotiations thatfor all water systems with total investment above Y 0.5million, the county quality assurance office would be retained to verify that constructionpractices and standards have met design specifications.

(b) Procurement: CPO procurement responsibilities include preparation of procurementdocuments and all aspects of the civil works tendering, bid evaluation and award process.

(c) Sanitation and Health Education Progrant CPOs also have responsibility for planning,design, construction and management of sanitation facilities under the project, as well asfor assisting the NPO in carrying out the project baseline survey. They will work with theNPO and PPOs in designing health education work and will execute the resulting workprogram.

(d) Project Evaluation and Reporting: The CPOs are responsible for preparation ofquarterly implementation progress reports for submission to PPOs, and for ensuring thataudit requirements under the project are met.

(e) Audit: CPOs will prepare consolidated accounts of county project expenditures, to beretained at the CPO for mission review.

Communities. The communities benefiting from the project will (a) decide their participation in the projectand level of service by choosing to sign the village commitment letter and paying the upfront cashcontribution, or not; (b) provide in-kind contribution of labor and materials needed for construction of thewater facilities; (c) supply (in most cases) the water facility manager, operator and accountant who will beresponsible for operating and maintaining the systems and collecting tariff revenues; (d) pay a water tariffsufficient to meet the operating revenue covenant; and (e) coordinate with the County Finance Bureausrepayment of the loan and credit. Communities, either at the county, township or village level, willultimately take over ownership of the water facilities depending on the scope of the investments.

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D: Project Rationale

1. Project alternatives considered and reasons for rejection:

Sanitation physical investments: Most of the physical investments in this project are related to watersupply rather than sanitation. This is because in previous Bank projects in China, efforts in sanitation andhealth education have fared worse than water supply. The Bank's first project supported only watersupply. The Implementation Completion Report from the first project noted that integration of watersupply with health education and sanitation would substantially increase health impacts. The secondtherefore added such components. The sanitation work sought to replace existing latrines with compostinglatrine models having high pathogen kill rates. Unfortunately, the cost of meeting mandated material andconstruction quality requirements of the approved latrine designs placed them out of reach for most of thepoor villages targeted by the project. The issue of affordability was remedied in part through subsidies;however, these failed to provide even a short-term solution for individual poor households. The thirdproject recognized from Chinese and international experience that willingness-to-pay (WTP) for improvedlatrines correlates highly with income. In the poor areas served by this project, if individual householdswith a high WTP could be identified, the village has the option of investing in designs and other technicalassistance, but the emphasis under the project is on changing water and sanitatiun-related behavior. Theproposed fourth project would follow on this model.

Project area selection: The major design challenge is to target funds on those who are poor butnonetheless have sufficient resources to upgrade their water supply once long-term financing can beprovided. The main risk is that these funds will be captured by middle-income communities rather than thepoor (higher income communities have already moved to safe piped water supply). With the exception ofGuizhou province, this project uses designation as a national- or provincial-level poor county as a basictargeting tool. Experience from previous water supply projects in China has shown that this approach hasbeen met generally with success. In each province, the participating counties were selected according totheir: (a) rural poverty, in which the poorest counties were given first rights of participation; (b)percentage of rural people lacking access to improved water supplies; (c) number of people exposed tounsafe water, as evidenced by fluoride or alkali content, or by the incidence of gastrointestinal illness; (d)existing provincial plans targeting priority areas of rural water improvement; (e) demonstrated ability toprovide the needed counterpart funds; and (f) willingness to form and staff a county project office to agreedstandards. Because Guizhou is one of China's poorest provinces, county selection criterion was widened toinclude all counties, with particular emphasis on the county's need for water supply improvements and thebeneficiaries' ability to repay the loan/credit. To minimize the risk that funds will be diverted tomiddle-income communities, this project will not finance any water systems in county seats in any of thefour provinces, given our expectation that these areas are able to finance these projects themselves.

Given the repayment constraint, the project does not target the poorest of the poor villages which are notable to afford the long-term costs of the project. While many of these villages are in need of improvedwater supply, they will have to rely on grant programs to provide financing. Instead, this project targetsthose poor villages just above this level, with the resources to upgrade their water supply once long-termfinancing is provided. Within each of these beneficiary villages, the poorest people will gain access to safewater. Because of the repayment constraint, and also the importance of building financially self-sustainingwater systems, this targeting was deemed appropriate.

2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

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LatestSupervisionSector tssue -Project : E P SR Ra&

_(Bank4inanced p rje ! onyImplementation Development

Bank-financed Progress (IP) Objective (DO)Rural water supply China Rural Water Supply (Cr. NA NA

1578-CHA)

Rural water supply, sanitation, and China Rural Water Supply and S Shealth education Sanitation (Cr. 2336-CHA)

Rural water supply, sanitation, and China National Rural Water S Shealth education Supply (Cr. N027-CHA)

Other development agenciesRural water supply and sanitation UNICEF: 1996-2000 Water

and Environmental SanitationProgramme

Health education and rural water supply "Knowledge for Life" programtechnical assistance UNDP/World Bank Water and

Sanitation Program (WSP)

Rural water supply technical and 1991 "Capacity Building andpreparatory assistance Investment Preparation for

rural Water Supply andSanitation in Poor and RemoteAreas" (CPR/91/141)

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3.. Lessons learned and reflected in the project design:

Cost recovery: Earlier projects established that Chinese villagers, even in poor areas, would contributecapital and pay tariffs sufficient to finance safe and convenient water supply. Furthermore, despiteabandoning collective farming, the village collective management structure remains sufficiently robust tomanage water systems. The Bank's Operations Evaluation Department's evaluation of the first China ruralwater project financed by IDA confirmed that finding, as well as financial and health benefits from watersupply investments. The second (RWSS) project was completed in December 1998. From this, we expectto obtain some quantification of the levels of cost recovery. Identified weaknesses in both projects includeoccasional excess optimism, hence system overdesign, and the need to improve quality through increasedproject office supervision of design and construction. Measures will be taken in this project to ensure thatthese weaknesses are corrected. The economic analysis for the third (NRWS) project, as well as interviewswith potential beneficiaries, showed that even the poorest villagers consider the health gains from cleanwater supply well worth the minimal upfront costs. Nearly all villagers are able and willing to pay for suchinvestments. Despite some weaknesses in a limited number of sub-projects, overall, by internationalstandards, water supply projects in China are extraordinary in their cost recovery and sustainability.

Needfor greater focus on education rather than physical sanitation investments., Experience from earlierprojects suggest the importance of focusing efforts on health and hygiene education, rather than physical

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sanitation investments, as a means of inducing behavioral change. For more details, see discussion abovein Question 1.

Needfor realistic expectations in terms of behavioral change:Although basic health knowledge is fairly widespread, behavior in rural areas often does not match thatknowledge. Experience from the previous projects suggests that even with higher quality education efforts,actual behavioral change can be a slow process. Slow progress in changing behavior does not invalidatehealth education efforts. A peer reviewer for the third water supply and sanitation project pointed out that,"on a dollar-to-dollar basis, it costs less to achieve health benefits from sanitation and health education thanfrom making water available." Previous projects in China as well as others worldwide have demonstratedthe importance of careful targeting and very specific health messages, rather than general injunctions tobehave well. This project will build on the experience acquired in the previous three projects in China, andcontinue to support the use of monitoring indicators and baseline surveys to help refine health messages andtheir delivery, thereby increasing the efficiency of these efforts.

Needfor strong project management at the national, provincial, and local levels:Previous experience has shown that the most successful Bank-financed projects in China have a strongcommitment from the borrower as well as strong leading groups and strong PMOs at the national,provincial, and local levels. The PMOs must be staffed with qualified, experienced, and competent staff inthe key areas of engineering, procurement, accounting/finance, and sanitation and health education. Thisproject will ensure that the same requirements for project management are kept at all levels. Developmentof the capacity of PMOs at all levels will be addressed through training workshop programs during projectpreparation and implementation.

Needfor measures to safeguard against overdesign of water systems:In the second (RWSS) project, a limited number of water systems were overdesigned, with negative effectsfor cost recovery. This was because in the RWSS project, the criteria for system design were determinedon an ad hoc basis. To correct for this problem, for the third (NRWS) project, the design manual wasupdated and required to be followed. Also, increased emphasis was placed on rigorous review of designs toensure that they are realistic with actual local consumption needs, and World Bank monitoring of thereview process was increased. This project will follow those measures taken by the NRWS project.

Needfor quality maintenance:Another lesson gathered from the RWSS project was that of the necessity to provide training in operationsand finance to local water plant staff in order to maintain the quality of each individual scheme. In theRWSS project, funding for such training was not included in the project and had to come out of localgovernment budgets. As a result, training in some instances was inadequate, and the quality of theinvestment was not always successfully maintained. This was corrected in the NRWS project, with theinclusion of project funding for local training, and will continue in the fourth project as well.

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4. Indications of borrower commitment and ownership:

Beneficiaries' commitment to their individual water scheme is demonstrated through their willingness tocontribute cash and in-kind contributions upfront to the construction of the water plant. Thesecontributions amount to 25 percent of the overall costs of the project, and represent a substantialinvestment for most households. Such a payment mechanism, whereby contributions are collected upfront,ensures that only those villagers wishing to participate will receive household connections to the new watersupply. In order to make this decision, villagers will need information about the options, costs, and benefitsof the new water scheme. Thus, this mechanism also helps ensure that the village and township leadershipthoroughly discusses the options and rationale for the project during the design phase for each watersystem, and solicit villagers' input concerning the design, as the leadership will ultimately rely uponvillagers' upfront contributions to help pay for the costs of construction. Previous experience has shownthat such a mechanism can be effective means for stakeholders to have a voice in the overall design of ascheme; in the second project, there are a number of documented instances where villagers, afterdiscussions of options with local leadership, triggered significant changes in the design of the eventualwater system. All water supply schemes for the project will be required to have the approval of the VillageCommittee in a document with an official seal. This document will represent the comnnitment of the villageleadership to the water system. Following construction of the water supply system, ownership of the waterplant will transfer to the village(s) and/or township(s), depending on the size of the system. Themanagement and staff of most water plants will also come from local villages and townships. This ensuresthat local beneficiaries have the largest input and stake in the operations and maintenance of the plant.Upon operation of the new system, villagers will continue to receive information about and provide input onwater quality. As part of the implementation of the health education component, village doctors, primaryschool teachers and Women's Federation representatives will also be involved in the informationdissemination to the target beneficiaries.

5. Value added of Bank support in this project:

The supply of clean water to rural people is a high priority of the Chinese government, and past experienceshows extremely high willingness to pay by project beneficiaries. Even the poorer villages have a provengood track record for long-term cost recovery; however, many poor villages cannot afford the upfrontcapital costs of constructing even modest systems. In China, there is little direct financing for the ruralwater supply and sanitation sector from the central government. Instead, rural people rely mainly on theirown contributions or local government subsidies to improve water supply. The IBRD loan / IDA creditand government counterpart financing will allow the beneficiary upfront capital contribution to fall from1 00 percent to 25 percent of total investment, considerably broadening the number of villages able to investin safe water supply. Bank involvement thus allows capital costs to be met on a long-term basis, with mostvillagers paying no more than 3 percent of annual income for access to safe water supply. Without theBank's support, most project villages would not be able to invest in the proposed water supplyimprovements. Bank involvement also ensures that water supply and treatment plants are more technicallysound than might otherwise be the case.

Moreover, the Bank can bring international experience to bear on the issues of health and sanitationeducation - issues which have been well-covered by China's mass education campaigns, but need to bemore effectively implemented. Health messages may be better targeted and alternative sanitation designsmay be proposed and implemented as a result of the Bank's involvement.

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E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (supported by Annex 4):

O Cost-Benefit Analysis: NPV=US$ million; ERR= %O Cost Effectiveness Analysis* OtherIdeally, participating villages would be chosen by evaluating the NPV generated by water investmnents,including public health, social welfare, or other externalities, and choosing that set of investments thatmaximized the surplus value across all villages. However, generating such information over the nearly 500piped water and 300 non-piped systems proposed would be excessively costly, if even possible to anacceptable level of uncertainty. A robust alternative test has been chosen, that of requiring villages to passa test of revealed demand-a willingness to supply 25 percent of upfront capital costs and levy watertariffs that cover the full operating costs of and loans incurred by the system. That test, a covenant in theproject described more fully in the financial analysis below, justifies the project in terms of private demand.It also guarantees a positive private economic rate of return and, as shown in greater detail in the EconomicAnalysis contained in Annex 4, can be expected to result in a positive net present value for the project.

2. Financial (see Annex 5): NPV=US$ million; FRR= %

Government Counterpart Finan!cin

Provincial Finance: Provincial counterpart funding is expected to average 5 percent, or $4.8 million, of the$92 million total project financing requirements. Provincial revenues allocated to fund this project are fromseveral sources: agriculture, enterprise and commercial taxes, and special allocations from the DrinkingWater for Humans and Animals Fund and Small-Scale Water Conservancy Project Fund. Due to projectfinancing commitments, on average, rural water supply, health education and sanitation expenditures of theparticipating provincial governments will increase between 3 to 40 percent during the implementation of theproposed project. However, the provincial counterpart funding requirement remains less than 0.2 percentof projected provincial on-budget expenditures, and in the event prefectures or counties are unable to meettheir counterpart funding obligations during implementation, provinces should be able to meet the shortfall.

Prefecture, County and Township Finance: Prefectures, counties and townships contribute the largestshare of proposed government fmancing-20 percent, or $19.2 million, of total project financing. Thesegovernments, through their finance bureaus, provide all funding not met by the IBRD loan / IDA credit,beneficiaries and provincial govemrnent contributions. In addition to funding CPO costs, their budgets areexpected to bear a share of the provincial and national project office management fees, and finance thenon-Bank-financed portion of local health and sanitation training. With the beneficiaries, they will financea portion of water supply, the full amount of sanitary latrine construction, interest during construction, andtransport, taxes and duties on goods and equipment.

In the past, the project counties have varied in their rural water, health education and sanitation spending asa proportion of budgetary expenditures, ranging from 0.5 to 6.2 percent. With the proposed project, annualcounty-level spending on these sectors will range from 0.5 to 2.6 percent of budgetary expenditures. As acriterion for county selection, county budgetary revenues plus transfers had to yield a large enough surplusto service the debt on the IBRD loan / IDA credit and contribute the agreed amount of county counterpartfinancing. The respective provincial finance bureaus are responsible for independently assessing the abilityof the prefecture and county governments to provide the required counterpart funds from assured sourcesand identifying to the Bank the sources of those funds. During implementation, the pattern of county and

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township financing will vary across years to meet the physical progress needs of construction.

Beneficiarv Financing

Benefiting villagers are expected to pay between 75 and 100 percent of the water supply capital costs:in-kind labor and materials contributions (typically 10 to 15 percent of the water facility investment costs),together with upfront cash payments collected prior to construction, make up 25 percent of capital costs.Through tariffs, the beneficiaries repay the county for the 50 percent of the capital costs covered by theIBRD loan / IDA credit. The local government contribution (25 percent of capital costs) may also berecaptured through the water tariff, at the option of the local government.

Beneficiaries will face per capita investment costs averaging between Y1 15 and Y250 for piped watersystems, between Yl40 and Y210 for deep-well handpumps, and Y365 for rainwater collectors. Projectvillage committees will collect the community and villager cash contributions about 3 to 6 months inadvance of construction to ensure firm commitment from the beneficiaries and to cover startup costs.

The project will seek to identify villagers willing to construct improved household latrines at their ownexpense, and in such cases provide technical assistance. In villages where no such households can befound, but some villagers are able to contribute at least half the cost of an improved latrine in labor andmaterials, the project will make a limited amount of funding available to assist in purchasing inputs, for nomore than three household latrines per village. The latter expenses will be covered either by Bankfinancing or government grants. By county option, beneficiaries may bear project office management coststhrough the water tariff.

Recovery of Water SuPPlY Costs

Rural beneficiaries in China have a long history of paying water supply operation and maintenance costs,as well as a large portion of the capital costs. This has been true under the three previous Bank-financedprojects and the practice will be continued under this project. In addition to the capital contributionsmentioned above, the tariffs will be set locally and reviewed annually by the CPOs to ensure that they coverthe full costs of water supply. At negotiations, assurances were obtained that, commencing not later thanthe second fullfiscal year of operations of such investment, water charges will be established andcollected annually at a level sufficient to cover operations and maintenance costs, administrative costs,taxes, and the greater of (a) interest charges and depreciation, or (b) debt service requirements (interestplus principle repayment). No subsidies from government on water supply credit repayment areanticipated, so tariffs will fully cover these expenses. Water charges are expected to total Y 29 to Y 62 perperson per year (no more than 4 percent of average per capita gross income) depending on location, type ofservice, and water volume consumed.

In many smaller communities with piped water systems, water usage is billed according to household sizerather than metered usage. Although this in theory discourages conservation, such supplies are oftenintermittent, limited to morning and evening peak demand periods, and the investment and administrativecosts of metering outweigh any efficiency gains. The few poor communities with strong collectiveenterprises may use those revenues to partially cover the cost of water. Where water plants offer 24-hourwater supply, the NPO and the Bank encourage the installation of household meters to manage demand.Rainwater collectors that serve individual households involve large upfront costs, but negligible operationsand maintenance costs. Since these are household systems, debt service costs and capital contribution costscannot be recouped through a tariff. Rather, government has the choice of capturing those costs throughgeneral revenues or assessing lump-sum charges on beneficiaries. Other non-piped systems, such as public

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hand pumps, also involve large upfront costs by the end-users. Here, debt service on the IBRD loan / IDAcredit and operations and maintenance costs are generally recouped through monthly usage fees based onhousehold size.

Fiscal Impact:

As both local and provincial governments have the option of recovering part or all of the costs of theircounterpart financing, the expected fiscal impact of this project will vary depending on how each level ofgovernment chooses to exercise this option.

3. Technical:

This project includes a 5-1/2 year implementation program of numerous water supply systems of lowcomplexity, serving communities ranging from small individual villages to clusters of villages inmulti-village schemes within a township. Responsibility for design of the water supply sub-projects varieswith size and complexity, with CPOs responsible for the smaller, simpler schemes, and increasing use ofconsultant specialists and design institutes as complexity and size increase. Guidelines for this and relatedtraining to PPOs and CPOs are provided by the NPO. Subprojects must be developed through feasibilitystudies carried out in accordance with the agreed framework, addressing technical, financial, operation andmaintenance, management and environmental issues

Project design entities must use the " China Rural Water Supply Engineering, Planning, and DesignManual" (1998 edition), which includes all of the technical standards for the design of rural water projectsin China. The quality of water supplied must meet the national standards for rural water supply. Thedesign manual provides guidance on such items as water source selection considerations, unit waterdemands appropriate to a range of situations, pump selection, treatment processes, disinfection andcontrols. Professional judgement is required during the feasibility study and design phases to ensure unitdemands and projections are not overstated, resulting in facilities too large for actual demands. Adherenceto the manual and a provision for comprehensive review of all designs helps ensure that appropriate,affordable and sustainable options are chosen and efficient, cost-effective designs result.

The water sources are mainly groundwater (underground aquifers and springs) with the remainder utilizingsurface water from streams and rivers, or rainwater collected in underground storage tanks. Water sourcesare assessed by the local Water Resources Bureau during the project development phase and during theoperational phase, water quality of sources is monitored regularly by County Anti-epidemic Station.

During preparation of this project, feasibility studies and preliminary designs of the water supplysub-projects included in the first year (2000) investment program are being carried out. The draftfeasibility reports of 27 of the 43 first year sub-projects were reviewed during pre-appraisal. In most cases,the proposed systems were technically acceptable. In a limited number of cases, problems emergedincluding unit demands being too high for local conditions resulting in unrealistic and unsustainabledesigns. These were discussed during pre-appraisal and corrective measures are being taken. During Apriland May 1999 preliminary designs will be completed and the data from them will be used to compile thematerials and equipment lists to be included in the first of the annual ICB procurement packages. Thisprocess will occur annually during the project.

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4. Institutional:

a. Executing agencies: Overall execution of the project will be the responsibility of the NPO. This agencyhas extensive experience in managing Bank financed projects. Its staff is very familiar with Bankprocedures and guidelines.

b. Project management: Day-to-day implementation and project management will be the responsibility ofthe PPOs and CPOs, and will be supervised by the NPO. The NPO will provide training for the staff of thePPOs and CPOs to ensure that they are familiar with all aspects of the project and the latest Bankprocedures.

5. Social:

Land Acquisition and Resettlement

Reflecting the expectation that the land acquisition and resettlement impacts of the project will be modestand the fact that the actual impacts will be known only on a year-to-year basis, the Bank Group did notseek an overall Resettlement Action Plan (RAP) for the project. Rather, a Policy Framework forCompensation, Resettlement and Rehabilitation of Project-Affected Persons (see PIP) was agreed with thegovernment during negotiations. The Framework requires each CPO to prepare an annual ResettlementInventory if fewer than 150 people are affected and otherwise to prepare a RAP. Each annual Inventory orRAP will be reviewed by the respective PPO and the NPO for conformity with the Framework and includedin the NPO's AWP. Assurances were obtained during negotiations that each province will carry out orcause to be carried out the resettlement of persons affected by the project according to the agreedResettlement Policy Framework and in a manner satisfactory to the Bank.

Investments that may invoke Chinese law or Bank Group policy conceming land acquisition arevillage-specific or multivillage piped water supply schemes. In most instances, the amount of land acquiredfor each treatment plant is no larger than 4-8 mu (4/15 to 8/15 hectare). Only in a few instances does landacquisition exceed 8 mu (8/15 hectare). To ensure that planners minimize land acquisition, the PolicyFramework stipulates that where planned or actual land acquisition exceeds 3 mu (1/5 of a hectare) for anyindividual investment, the county will be required to obtain PPO no-objection in addition to any localclearances needed. Where planned or actual land acquisition exceeds 5 mu (1/3 of a hectare) for anyinvestment, or where residential buildings will be acquired, the county will be required to obtain NPOno-objection in addition to any local clearances needed. Considerable flexibility usually exists in waterplant siting, so that housing or other buildings need rarely, if ever, be acquired. On the other hand,acquisition of cultivated land may be difficult to avoid. Where that happens, the current users will becompensated in a fashion that maintains or increases their standard of living.

Ethnic Minorities

Ethnic minorities constitute a disproportionately high percentage of the overall beneficiary population. InChina, ethnic minorities make up approximately six percent of the country's total population. Of the

( project's 3. 1 million beneficiaries, close to 600,000, or 1 8.4 percent, are ethnic minorities. The majority ofthe ethnic minority beneficiaries are found in Guizhou province, where the 484,000 minority beneficiariesconstitute nearly 60 percent of the total. One of the counties in Guizhou is a minority autonomous county,and in total, provincial officials plan to include 77 minority townships in the project. Ethnic minoritybeneficiaries also number 92,000, or 15.4 percent of the total beneficiary population, in Hainan, where halfof the total project counties are minority autonomous counties. In Anhui, the number of the ethnic minoritybeneficiaries is 23,200, or 1.8 percent of the total beneficiary population. Only in Fujian are there no

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minority beneficiaries expected in the project.

6. Environmental assessment: Environment Category D A 7 CZ B OZFI

The balance of the environmental impact is expected to be substantially positive; however, potentialadverse impacts from construction or a failure to protect water supply sources require the classification ofthe project as Category B in terms of the Operational Directive on Environmental Assessment. The PIPdetails the environmental mitigation plan developed for the project. The project relies on a thorough reviewand supervision process to ensure that environmental concerns are answered. Several organizations shareresponsibility for recognizing and mitigating environmental problems. The most important work iscompleted during the design stage. Designers must recognize potential problems and design to avoid thern.This includes attention to the quality and nature of water sources, the engineering and constructionpractices dictated in bidding documents, the provision for chlorination or other water treatment, and, inhealth education, inclusion of the key health practices. The design responsibilities vary by water supplysystem size and complexity, with county project offices undertaking the easier work themselves andcommissioning the more difficult. Chinese design manuals incorporate guidelines for proper water systemconstruction practices (i.e., minimal ground disturbance, source protection). Design review is provided bythe provincial or national project offices for larger projects. At each review stage, good environmentalpractice will be one evaluation criterion. County construction quality assurance offices must certify thatdesigns are adhered to for projects valued at more than Y 0.5 million. Below that amount, CPOs providethat service. Finally, for piped water systems, the county environmental protection bureau must certify thatthe project complies with government regulations that require the designs to contain appropriateenvironmental protection, and ensure that construction and operations observe those regulations. Thus,standard engineering reviews are supplemented by professional environmental oversight for the systemsmost likely to have environmental impacts.

Potential environmental problems must be evaluated against the type of water supply system anticipated.The bulk of the beneficiaries would use water from piped systems supplied by wells. Wellheads are insmall compounds, protected from surface pollution. Simple chlorination systems are provided in case theregular water quality testing shows problems with bacteria. If the latter occur, they are most likely to enterthe system from the pipe network, due to the intermittent operation that characterizes the smallest systems.Villagers will be encouraged to continue boiling water as an additional protection. Other piped systems usesurface water supplies, which face a higher risk of bacterial contamination. Many sources are springs, forwhich special source protection measures, including villager education and physical protection from animalintrusion, will be taken. In the few cases where river water supplies the plant, raw water quality testingintervals will be shorter and continuous chlorination very likely. Such water plants will have personneltrained in water quality testing, equipped with standard test kits. These are employed successfully underprevious projects.

Where the improved water supply relies on hand pumps, wells are typically scattered through the villages.Such wells are more vulnerable to contamination from surface water, livestock, or latrines. Consequently,well aprons are designed to prevent surface water contamination, wells are cased, and latrines and animalpens are separated from the wells by minimum adequate distances. Well designs and setback distances arespecified by standard design manuals.

A third type of water supply is rainwater collectors. These channel rainfall runoff, generally from the roofsof houses, into holding tanks. To minimize pollution from runoff, the systems are manually operated, withhouseholders instructed to permit the first flush to drain to the ground before directing further runoff into

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the holding tanks. Householders are further trained to periodically add bleach to their tanks to minimizerisk from bacteria, and to continue boiling water. Tanks themselves are impermeable, with the mouthelevated, covered when not in use, and surrounded by an apron to minimnize pollutant ingress at theextraction point. The county epidemic prevention station provides semiannual water quality testing forthese tanks.

For any of the well systems, water quality can be a problem due to saline/alkaline water intrusion intopermeable aquifers or to high concentrations of fluorides, arsenic, and other potentially toxic materials.These problems draw particular attention in this project, for many of the investments would provide newwater sources to escape precisely those problems in current drinking water supplies. Water quality testingwould be carried out for all water sources, and where fluoride and arsenic are problems, that testing willextend to careful assessment of the geology of the area, to identify sources unaffected by toxins andunlikely to be affected by them through aquifer recharge. Periodic water testing would then continue tolook for evidence of these problems.

Water extraction in the size plant envisioned here is too small to affect groundwater resources other than inthe immediate surrounds of the well, where the pumping capacity may exceed the aquifer yield. That mightresult in damage to the pump, but not to the environment. All new wells would be subject to standard yieldtests, the protocol for which was judged adequate by Bank engineers. Similarly, springfed and surfacewater supplies may not provide sustainable supplies through both wet and dry seasons and in droughtperiods. However, these local sources are well known, with the larger having documented flow historiesoften over hundreds of years. Where needed, such as in one county where several plants will draw from thesame river, a formal hydraulic study would be made to assess the sustainability of the supply and potentialimpact on downstream users. Where mitigating actions are necessary, they will be taken.

The project also includes the provision of household and school composting latrines. These latrines,designed to retain fecal material at a sufficiently high temperature for a sufficiently long time to kill mostpathogens, clearly improve on the current latrines. They are sealed, hence prevent any passage ofpathogens directly into the soil, and when the compost is used on fields it does not threaten surface orgroundwater supplies. Furthermore, the latrines are designed to reduce insect access, virtually elirninatingthat pathogen vector. For all these reasons, and the fact that construction of these latrines should itselfhave no significant environmental imnpact, this component presents no environmental risks.

Finally, the health and sanitation education component focuses on modifying behavior to secure the safe useof water or otherwise improve hygiene. Any success in this effort will lead to unambiguous environmentalimprovement.

7. Participatory Approach (key stakeholders, how involved, and what they have mifluenced or mayinfluence; if participatory approach not used, describe why not applicable):

a. Primary beneficiaries and other affected groups:

The primary beneficiaries are the rural village residents (IS). When seiecting villages to participate, CPOofficials consult with village leaders and feasibility studies are carried out for every scheme. Eachfeasibility study must include a document from the village leaders (CON) confirming the residents agreed tothe project, understand the cost levels and benefits and agreed to pay appropriate cash and in-kindcontributions and pay tariffs at levels sufficient to meet operation and maintenance costs and repay loans.

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b. Other key stakeholders:

Other key stakeholders in the project include the village, township and county level workers implementingthe sanitation/health education components of the project (IS); women's groups such as the All ChinaWomen's Federation (CON); children benefiting from the health education program (IS); and the educatorsin the school system (CON).

F: Sustainability and Risks

1. Sustainability:

Local government funding and beneficiary financing through water tariffs provide a framework for projectsustainability. Water plants constructed under this project are maintained as independent systems, withtariffs set at a rate to cover the original investment and repay the loan. For most villagers, these tariffs areusually less than 3 percent of their annual gross per capita income. Benefiting villagers are expected to paybetween 75 and 100 percent of the water supply capital costs. This payment is broken down as follows: atotal of 25 percent of the costs are recovered from an upfront contribution consisting of cash and in-kindlabor and materials contribution (typically totaling 10 to 15 percent of capital costs); another 50 percent ofthe capital costs are captured through tariffs; and a further repayment of up to an additional 25 percentmay also be incurred by villagers depending on the percentage of the local government contribution passeddown through tariffs. In most instances in the first three projects, this arrangement has demonstrated highlevels of sustainability. That would be enhanced under the current project through increased villagerparticipation, better construction supervision and more intensive training of plant operators and managers.

Previous experience has shown that sanitation costs often exceed villagers' willingness to pay. This projectwill take steps toward ensuring replicability in this area by identifying higher-income households willing toinvest in improved sanitation, and by using sanitation education to induce increases in willingness to pay.Health education financed by the project would be integrated with existing government-led programs, andwould focus on sustainable behavioral change rather than on simply delivering messages to a target numberof people.

On the institutional side, project training would provide the project offices with a foundation for efficient,cost-effective operation of the investment program. Efficient water supply system operation would benefitfrom training and institutional support in finance and water plant operation and management. Surveys toestablish monitoring indicators and baseline conditions will provide valuable information, both foreducators targeting health and sanitation messages and for measuring the benefits of this project.

2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Ri_k Risk Minimizatin M_asureFrom Outputs to ObjectiveExcessive extraction from or polluting N Feasibility studies will be required forinputs to the various surface and each sub-project and will considergroundwater sources used by the water environmental risks and decide on anysystems, forcing either expensive raw necessary source protection measures.water treatment or a move to alternativesources.

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Rapid deterioration of sub-project's N Regular monitoring of water quality iswater quality, as shown by the required to be done by the water plantre-emergence of fluoride and/or arsenic and/or the local Anti-Epidemic station.after its initial disappearance. County Project Offices should ensure

that water quality records are kept ateach water plant.

From Components to OutputsRisk of failure to comply with the M Counties are required to factor in Bankoperating revenue covenants due to Group-estimated purchasing powerfluctuations in the exchange rate, as parity foreign exchange rates,repayment obligations are fixed in generating higher counterpart funding indollar terms while investments yield Yuan terms.only local currency income.

Project finance risks due to delays or M Past experience shows that beneficiariesinability to generate counterpart funding have little trouble meeting their 25at the provincial, prefectural, county, percent upfront contribution. If localand/or beneficiary level. and provincial governments do not meet

counterpart funding commitments, loansmay be redirected to other villagesand/or counties.

Inability to implement tariff structure M Tariff estimates are made as part ofdue to intervention by local price each sub-project's feasibility study.bureau, thus impairing the financial These are reviewed prior to anability and performance incentives of investment being made.the water company.

Poor performance of the national, M Consultant and national best-practiceprovincial, and/or county project input in training programs and otheroffices. issues.

Failure of the health and sanitation S Previous experience and requiredprogram to induce significant change in baseline surveys will help target andbehavior. further sharpen health education

programs which stress hygienicwater-related practices and water sourceprotection; sanitation investmentsreduce pathogen loads.

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Overoptirnistic projections of M Project offices are required to followbeneficiaries' consumption levels, national guidelines on estimatingleading to system overdesign and consumption levels when completingdifficulties in cost recovery. feasibility studies which analyze the

sub-project's financial sustainability.

Government restructuring prevents full M Restructuring at the provincial andstaffing of provincial and county project county levels is set to begin in 1999.offices. This will be monitored and raised as an

issue in the future if necessary.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects

G: Main Loan Conditions

1. Effectiveness Condition

Standard conditions for effectiveness.

2. Other [classify according to covenant types used in the Legal Agreements.]

During negotiations, assurances were obtained from the Borrower that:

(a) the provinces will complete the baseline surveys for villages receiving new water suppliesin 2000 and submit them to the NPO no later than December 1, 1999. The NPO shallconsolidate and analyze those surveys, submitting them to the Bank no later than January1, 2000; [Dated Covenants]

(b) each CPO and PPO will prepare semiannual progress reports and submit them to the NPOnot later than one month following the end of the reporting period. The NPO will prepareand submit a consolidated semiannual progress report to the Bank not later than two andone-half months following the end of the reporting period. The first report would covertwo reporting periods, from July 1, 1999 to June 30, 2000; [Dated Covenants]

(c) the NPO will (i) prepare, not later than six months after the Closing Date, or such laterdate to be agreed with the Bank, a plan for the future operation of the project; and (ii)afford the Bank a reasonable opportunity to exchange views on said plan; [DatedCovenants]

(d) a mid-term review, to be undertaken no later than June 1, 2002, will review progress inmeeting project objectives, as reflected by the monitoring indicators. The review wiliidentify any changes needed to meet those project objectives, including but not limited toallocation of unallocated credit funds and commitment of additional counterpart funds;[Dated Covenants]

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(e) the NPO will appraise, using agreed criteria, all water supply investments with anestimated total investment above Y 3.0 million for the quality of their engineering andfnancial preparation and their overall feasibility. Procurement of project related workswill not commence prior to successful NPO appraisal [Implementation Covenants];

(f) a consolidated project AWP for the following year will be prepared and submitted to theBank for review and approval no later than November 30 of each year; [Dated Covenants]

(g) the national consolidated account of project expenditures prepared by the NPO will besubmitted to the Bank no later than six months after the end of the fiscal year.Additionally, the following annual audits should be carried out and maintained at theProvincial Finance Bureau for mission review: (i) provincial consolidated accountsprepared by the PPO; (ii) SOEs and Special Account maintained by MOF and theProvincial Finance Bureau; and (iii) county accounts of project expenditures carried out bythe CPOs. To ensure better review of large-scale water supply systems, each water plantfacility with total investment greater than Y 5 million will be audited at the end of its firstfull fiscal year of operation in accordance with auditing principles consistently applied byindependent auditors acceptable to the Bank, such audit to be submitted to the Bank forreview no later than 6 months after the end of the audited fiscal year. [FinancialCovenants]

(h) each province will carry out or cause to be carried out the resettlement of persons affectedby the project according to the agreed Resettlement Policy Framework and in a mannersatisfactory to the Bank [Implementation Covenants];

(i) the PPOs will appraise, using agreed criteria, all water supply investments with anestimated total investment above Y 0.5 million and not exceeding Y 3.0 million for thequality of their engineering and financial preparation and their overall feasibility. Withinthe mandatory review limits, procurement of project related works will not commence priorto successful PPO appraisal [Implementation Covenants];

(j) provincial AWPs for the following year will be prepared and submitted to the NPO forreview and approval no later than October 15 of each year; [Dated Covenants]

(k) for all water systems with total investment above Y 0.5 million, the county qualityassurance office will be retained to verify that construction practices and standards havemet design specifications [Implementation Covenants]; and

(1) commencing not later than the second full fiscal year of operations of such. investment,water charges will be established and collected annually at a level sufficient to coveroperations and maintenance costs, administrative costs, taxes, and the greater of (i) interestcharges and depreciation, or (ii) debt service requirements (interest plus principlerepayment). [Operating Revenue Covenant]

H. Readiness for Implementation

Z 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

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O 1. b) Not applicable.

1 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.Z 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.0 4. The following items are lacking and are discussed under loan conditions (Section G):

Note: Re: l.a) and 2. above. Engineering designs for the first year will be completed by May 1999, withcivil works bid documents being completed during the remainder of 1999 to ensure construction starts inearly 2000, which is the first year of construction.

1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.O 2. The following exceptions to Bank policies are recommended for approval. The project complies withall other applicable Bank policies.

George N, Plant Keshav Varma Yukon HuangTeam Leader Sector Manager/Director Country Manager/Director

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Annex 1: Project Design SummaryCHINA: Fourth Rural Water Supply and Sanitation Project

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Human development: poverty Increased incomes and Annual figures published by Government's commitment isreduction. improved health conditions the State Statistical Bureau, sustained.

nationally. Ministry of Public Health,Provincial Health Bureau, andProvincial Governments.

Project Development Outcome I Impact Project reports: (from Objective to Goal)Objective: Indicators:Reduce the time and cost for Number of villagers served by Figures provided by the Increased convenience frompeople in poor rural areas to project-supplied water National Project Office, sub-project systems savesobtain clean, safe water meeting national rural water Provincial Project Office, and labor which is diverted tosupply, while improving quality standards. County Project Offices. other more productiverelated sanitation and health Baseline survey and Progress activities.behaviours through education Namber of sanitary latrines reports.and pilot investments. constructed in villages in the Government efforts to control

project counties in addition to pollution and diseases arethose constructed under the sustained.project, and the precentagepoint improvement in keywater-related healthbehaviours.

[Note: No specific indicatorsare given for time and costsavings because (a) theexercise of preciselyquantifying these savings isexpensive and (b) this exercisewould provide little additionalinformation additional to thatfrom financial performance.The financial covenantperformance, throughdemonstrated willingness topay, reflects villagers' ownperception of time and costsavings. Time andcost-related questions areincluded in the baselinesurvey.]

Output from each Output Indicators: Project reports: (from Outputs to Objective)component:

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Safe, conveniently-located Number of people newly Progress reports from National Technical and environmentalwater to 3.1 million people in served with safe water. and Provincial Project Offices. risks are minimized. Water27 counties. sources show no sign of

deterioration.

Sustainable investments in Percentage of water systems Operational reports from the Unforeseen costs do not arisewater systems. meeting the tariff covenant by National and Provincial over time from other sources.

the second full fiscal year of Project Offices. Proper financial managementoperation. of systems.

Increased adoption of safe Improvements in the Baseline surveys. Progress Project is replicated acrosswater-related health, hygiene, percentage of people reports from National and households. Eventually, moreand sanitation practices. practicing key water-related Provincial Project Offices. villagers are willing and able

behaviors. Number of to pay to install safe latrines invillagers using their own their own households.resources to construct Successful diffusion ofadditional sanitary latrines. improved behavioral practices

across individuals andvillages.

Project Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)Water supply, including piped US$74.2 million to 3.1 Project office progress reports, Local and provincial(household connections and million people in 27 counties disbursement reports, required governments meet counterpartcommunity standpipes) and in 4 provinces. Annual Work Plans including funding commitments;non-piped (handpumps and design and financial feasibility beneficiaries are able to payrain catchments) systems studies, and Bank supervision 25 percent upfront

missions. contribution. Local pricebureaus and other agenciescooperate to establishappropriate tariff levels toensure financial sustainabilityof new water systems.

Sanitation and health US$7.3 million Project office progress reports Targeted health educationeducation. and Bank supervision programs stress hygienic

missions. water-related practices andwater source protection;sanitation investments reducepathogen loads. Baselinesurveys target appropriateareas of health behavior.Increased education inducesbehavioral change.

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Project management US$4.9 million Project office progress reports, Project offices are fully staffeddisbursement reports, and and funded. TrainingBank supervision missions. programs and consultant input

are utilized to address specificproblems such as procurementand design work.

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Annex 2: Project Description

CHINA: Fourth Rural Water Supply and Sanitation Project

By Component:

Project Component 1 - US$74.2 million

The Water SupPly Component

The water supply component will give villagers in all 27 counties the opportunity to invest in improvedwater supplies. No constraints are set on the type of system chosen, which can range from thehousehold-specific solutions of rainwater collectors or shallow or deep-well hand pumps, to single- ormultivillage community piped systems. Households can choose whether to invest in individual householdconnections or to rely on community standposts.

Piped Water Supply Systems. Piped water supply systems will serve over 99 percent of theapproximately 3.1 million project beneficiaries. According to the government's preliminary estimates, atotal of 479 water facilities will be constructed, of which 454 are planned to provide direct householdconnections. The continuing shift from hand pumps to piped systems with household connections that hasbeen occurring since the first rural water supply project reflects both consumer demand for the convenienceand status afforded by individual household water taps and their willingness to pay up front the additionalcosts. Spring water sources are the most cost-effective because the water is usually of good quality and notreatment, apart from disinfection, is necessary. Often, spring systems can be gravity-fed, removing theneed for storage tanks and pumps. Surface water systems are usually the most costly because watertreatment is required, as is pumping to storage tanks to maintain system pressure. The majority of theproposed systems (70.6 percent) are medium-scale (Y 0.5 million to Y 3 million). Of the remainder, 27.4percent of the systems are small-scale (less than Y 0.5 million investment), while only 2.1 percent arelarge-scale (over Y 3 million). In the first-year program, 43 piped systems are proposed for construction,after which 357,400 rural residents would have access to safe drinking water.

Non-piped Water Supply Systems. The proposed project also contains a limited number of alternativelow-cost water supply technologies (point sources) to serve communities where population is sparse and/orground and surface water is scarce. According to the government's preliminary estimates, the proposedproject would construct 120 household rainwater collectors and 173 deep-well hand pumps. These systemswould collectively serve 30,213 rural residents, or slightly less than one percent of the total beneficiaries.Rainwater collectors are planned for the mountainous regions of Guizhou Province, where rainfall isplentiful, but access to surface water is difficult. Deep-well hand pumps are planned for construction inAnhui and Hainan Provinces. Fujian Province does not plan to construct any non-piped systems. In thefirst-year program, 16 deep-well hand pumps will be constructed, serving 1,700 people.

Planning and Design Criteria. The piped water supply systems proposed in the project have been selectedas the least-cost solutions. The criteria used in the design of the piped systems are based on the ChinaRural Water Supply Engineering, Planning, and Design Manual prepared by the Executive Office of theNational Patriotic Health Campaign Committee. Per capita domestic water consumption is assumed torange between 40 to 80 liters per day depending on the sufficiency of the water sources and the climaticconditions. For animals and other uses, a consumption allowance of 10 liters per day is used. Fornon-piped systems 30 to 40 liters per capita per day are considered adequate design demands. A designperiod of 15 years is selected (10 for some of the smallest plants) and the annual population growth is taken

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as 1.2 percent. A factor of 1.5 is used for maximum day demand and the peak hour demand factor appliedvaries from 2.5 to 4.0. The minimum system design pressure in the pipe network must be not less than 5meters. Non-piped water supply systems use the design criteria specified in the China Rural Water SupplyEngineering, Planning, and Design Manual.

Training. Training sessions will be conducted by the CPOs for water plant managers, operators, andaccountants. Manuals for this training have already been prepared by the NPO, and will be disseminatedthrough the CPOs.

Project Component 2 -US$7.3 million

The Sanitation and Health Education Component

This component seeks to help maximize the opportunities for reducing the incidence of waterborne diseasein three ways: (a) make available information on improved latrine designs, their investment costs andeconomic and health benefits by sponsoring village information sessions about water supply, improvedlatrines, and related hygiene practices; (b) finance improved latrine facilities on a demonstration basis inproject village schools and in one to three households in each project village; and (c) identify specific typesof behavioral change that will improve health conditions, finance the preparation of health educationmaterials and finance support to local health networks to expand and upgrade existing health educationinformation programs in the project areas, increase local media coverage of health issues, make healtheducational materials accessible to more rural people, and train additional local health experts.

The component will comprise of the following:

Training. The NPO and CPOs will provide health education training to local leaders, including primaryschool teachers, village doctors, and Women's Federation representatives.

Health Education. The NPO will develop, and provincial and county project offices and local leaders willimplement, an education information program that will emphasize the importance of behavioral change andthe link between hygienic practice and improved health primarily to housewives, young women and schoolchildren. Development of education materials will be done with the assistance of agencies selected througha competitive process. The information program will be implemented in four phases: Phase I-awarenessof project objectives; Phase 11-awareness of environmental protection and sanitation promotion; PhaseIII-water utilization; and Phase IV-hygienic behavior. Phases I and II of the health information programwould be implemented in project villages prior to the construction of water supply schemes in each village,and Phases III and IV during and after the construction period.

Construction of Three Household Composting Latrines. For those villagers willing and able toconstruct improved household latrines at their own expense, CPOs and county/municipal sanitary andepidemic prevention stations will provide technical assistance. Where villagers are able to contribute atleast half the cost of an improved latrine in labor and materials, but not the full capital cost, the project willmake a limited amount of funding available to each village to assist in purchasing inputs, for no more thanthree household latrines per village. The latter expenses will be covered either by beneficiaries, Bankfinancing or government grants. Only those households that are able to pay part of the cost of the latrinewill be supported under this component, to avoid providing models that cannot be followed withoutsubsidies.

Construction of Three to Five Village School Composting Latrines. In each project county, the CPO

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will select three to five villages to receive public school composting latrines.

Schedule. The NPO will prepare materials for the first two phases of the health education component onthe basis of existing information, in order to begin training-of-trainers for the first-year program no laterthan January 1, 1999. The health education information program for Phases I and II will be carried out inall first-year villages by the beginning of the construction season in April 2000. The NPO will use thefindings of the baseline surveys to develop targeted, specific health education messages, and would preparematerials and begin to implement training for Phases III and IV of the health education informationprogram by September 2000.

Project Component 3 - US$ 4.9 million

The Proiect Mana2ement Component

The project management component comprises (a) the establishment and maintenance of the county,province and national project offices; (b) technical assistance and training for project office personnel; (c)financing of project management and supervision activities; and (d) development and implementation ofbaseline surveys.

Establishment and Maintenance of Project Offices. The existing NPO, four PPOs, and 27 CPOs willoperate during the implementation period of the project to carry out day-to-day project activities. Thefollowing physical assets will be required to support this work:

(a) Office Space. At the provincial and county levels, if new facilities are required, space willbe rented, or provided free of charge if the project will be operating out of a governmentbuilding; no dormitories will be funded under this project.

(b) Warehouses. At the county level, warehouses will be rented, or, if suitable facilities arenot available, construction of adequate warehouses will be funded through the project.Warehouses will be financed by counterpart funds.

(c) Vehicles and Office Equipment. These items will be procured through the project if suchequipment is not already available.

(d) Operating Expenses. These include communication, transportation and stationary coststo be funded by the project.

Technical Assistance and Training for Project Management Office Staff. The national, provincial andcounty project offices with a full complement of staff will employ approximately 500 persons to implementthis project. To maximize their participation, training and technical assistance will be provided in thefollowing areas:

(a) Procurement. Annual assistance by qualified procurement personnel will be provided tothe NPO to improve preparation of ICB bidding documents. The CPOs and PPOs willreceive ongoing procurement training from the NPO, particularly on procuring civil workscontracts and on preparation of ICB bidding documents. There are approximately 53procurement staff who will require this training.

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(b) Project Management. Provincial and county project office directors and deputies will betrained by the NPO in human resource management, project scheduling, monitoring,evaluation, reporting, supervision, budgeting, and funds management. PPOs will haveadditional follow-up training sessions for the CPOs. Approximately 72 management staffwill participate in these sessions.

(c) Finance and Accounting. The NPO will train all PPO and CPO financial project staff onthe accounting system used to track project expenditures, maintenance of supportingdocumentation, preparation of financial reports, and processing of disbursement andSpecial Account reimbursement requests. PPOs and CPOs will also be trained in financialmanagement aspects of water utilities and financial analysis of water supply systemoptions. There are approximately 135 financial staff requiring this training. It is alsodesirable that county and provincial auditors attend this meeting to familiarize themselves.

(d) Water Plant Engineering and Operations. Approximately 95 project office engineeringstaff will require training in water plant site selection, hydrogeological surveying,construction management, water plant operations management and water qualitymonitoring. The NPO will design all training programs and carry out initial training, withfollow-up training provided by the PPOs. Technical assistance from county and provincialdesign institutes to review and prepare some water facility engineering designs, as well asfrom construction supervision bureaus to supervise construction works will be required.

(e) Sanitation and Health Education. Approximately 89 personnel will require training inthe design of health education programs, composting latrine designs, costs and benefits,and latrine construction supervision. The NPO will conduct the initial training, withfollow-up training to be provided by the PPOs.

The costs include technical assistance and training-related organizational and administration costs incurredat the national, provincial and county levels.

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Project Management and Supervision. Nearly 500 piped and 300 nonpiped water facilities will beconstructed, and the project beneficiaries will receive training to improve their health and hygiene andsanitation practices. To oversee the successful implementation of these investments, the national,provincial and county project offices will need to spend the majority of their resources on design review,supervision of project implementation, and project monitoring, evaluation and reporting. These activitiesare summarized as follows:

(a) Design Review. To facilitate PPO assessment of CPO engineering and financialcapabilities, each PPO is expected to conduct site review of each of the first three watersupply system designs in each county, or the full county first-year work program,whichever is greater. In each subsequent year, the PPO will conduct site review of nofewer than 20 water supply systems per year, including all systems with estimated totalcosts above Y 500,000 and at least two systems below the mandatory review limit size.The reviews will include all engineering factors, as well as the financial analysis andcounterpart funding plans. All mandatory reviews are expected to be carried out in thefield. The NPO will conduct mandatory review of all systems with estimated totalinvestment costs above Y 3 million and not fewer than 8 of the largest provincial systemsin any given year, such review to occur in association with site visits and to be conductedby teams of financial analysts and engineers. Design review, travel and subsistence costswill be funded by the project.

(b) Supervision. This is comprised of on-site inspection of water plant construction andoperation, latrine construction and health education training programs. PPOs should planto visit all project villages at least once every year to review the status of projectimplementation, and CPOs will need to make frequent village visits depending on eachvillage's stage of development. Where water plant size and complexity is beyond thescope of the CPO's experience, provincial construction supervisors should be engaged toperform that function. Supervision travel and subsistence costs will be funded by theproject.

(c) Monitoring, Evaluation, and Reporting. These activities include conducting baselinesurveys, monitoring performance indicators, and preparing quarterly performance reportsand biannual project financial statements. Related travel and subsistence costs will befunded by the project.

(d) Development and Implementation of Baseline Surveys. The NPO will oversee, andCPOs will conduct, baseline surveys in project villages, to provide a basis for futuremonitoring and evaluation. The baseline survey will cover 15 percent of the villages ineach of the 27 project counties over the course of three years; in each village, a primnaryschool (Grade 4) class and 10 housewives between the ages of 20 and 45 will be surveyed.The survey will cover basic information on population, gross income level and sources,coverage of different water systems and latrine types, time and distance traveled to collectwater, the incidence of water-related diseases, health education activities and coverage ofvillagers and school children, and percentage of rural residents washing their hands beforemeals and after using the toilet, and drinking boiled water. A copy of the format of thesurvey is included in the Project Implementation Plan. The field work for the baselinesurvey will be carried out by CPO staff, beginning no later than October 1, 1999. Thefinal report for the baseline survey will be prepared by the NPO and submitted to the Bankfor review by January 1, 2000. Resurveys will be conducted after the fourth year of the

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project, or more frequently as needed.

Financing Arrangements for Project Management Costs. The project office budgets will include thecosts of leasing office and storage space (storage space may be constructed at the county level if suitablespace is not available for rent), supervision expenses, office staff training expenses, transportation toproject sites, and contracting for construction supervision or other outside services; office staff salaries arenot included in the budgets. The IBRD loan / IDA credit will be used to fund a portion of the vehicles andoffice equipment, and technical assistance and training costs. Transportation, travel expenses, and officeoperating expenses will be funded by county governrments. The NPO, PPO and CPO costs will be borne bycounty-level counterpart funding annually in amounts proportional to each county's project investmentcosts. It is the responsibility of the county government to repay any credit proceeds used to finance projectoffice assets. Some counties pass on all or part of these costs to beneficiaries through the local watertariffs.

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LIST OF PROVINCES AND COUNTIES

Anhui Province Guizhou Province

1. Qianshan County 15. Jinsha County2. Guichi County 16. Kaiyang County3. Yingshang County 17. Nayong County4. Linquan County 18. Xiuwen County5. Qingyang County 19. Zheng'an County6. Wuhe County 20. Qianxi County7. Wuwei County 21. Bijie County8. Lujiang County 22. Xifeng County

23. Weining CountyHainan Province

Fuiian Province9. Ding'an County10. Tunchang County 24. Changting County11. Changjiang County 25. Pingtan County12. Lingao County 26. Liancheng County13. Ledong Li Nationality Autonomous County 27. Pinghe County14. Lingshui Li Nationality Autonomous County

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Annex 3: Estimated Project Costs

CHINA: Fourth Rural Water Supply and Sanitation Project

Water Supply 38.5 22.4 60.9Health, Education and Sanitation 5.1 1.0 6.1Project Management 3.9 0.2 4.1

Total Baseline Cost 47.5 23.6 71.1Physical Contingencies 7.1 3.5 10.6Price Contingencies 2.8 1.9 4.7

Total Project Costs 57.4 29.0 86.4Interest during construction 5.4 5.4

Front-end fee 0.2 0.2Total Financing Required 57.4 34.6 92.0

Goods 10.2 28.9 39.1Works 37.6 0.0 37.6Services 0.5 0.0 0.5Training 3.5 0.1 3.6Other 5.6 0.0 5.6

Total Project Costs 57.4 29.0 86.4Interest during construction 5.4 5.4

Front-end fee 0.2 0.2Total Financing Required 57.4 34.6 92.0

Other includes: Land Acquisition under the Water Supply component ($3.6 mil.) and Project Managementand Supervision under the Project Management component ($2.0 mil.).

Interest During Construction is based on: (i) onlending rates for projected disbursements of loan proceeds;(ii) payment of commitment charges; and (iii) service charges for projected disbursements of creditproceeds.

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Annex 4CHINA: Fourth Rural Water Supply and Sanitation Project

ECONOMIC ANALYSIS

Water Supply

1. The project will benefit an estimated 3.1 million rural people in 27 poor counties. Ideally,participating villages would be chosen by evaluating NPV generated by water investments, including publichealth, social welfare, or other externalities, and choosing that set of investments that maximized thesurplus value across all villages. However, generating such information over the nearly 500 piped waterand 300 non-piped systems proposed would be excessively costly, if even possible to an acceptable level ofuncertainty. As an alternative, villages are required to pass a test of revealed demand-a willingness tosupply capital and levy water tariffs that cover the full operating costs of and loans incurred by the system.Thus, the water investments are justified in terms of private demand. A very wide array of villages wouldmeet such a test, including those that are relatively well off, yet still unserved by safe water. In practice,counties select villages based on an initial assessment of the cost of supplying water and whether the likelyvillage demand would meet those costs. If they feel a particular village might be eligible to participate, theyoffer the opportunity and the village makes its own assessment of services, costs, and willingness to pay.When a village elects to participate, a feasibility study is done that more carefully fixes service levels andcosts, and villagers have a second opportunity to opt out of, or attempt to modify the terms of,participation. The village selection technique biases selection toward better-off villages in the county.However, given that the highest income villages in the project counties already have piped water systems(on average, 18 percent of the villages already have such service), and that the credit will provide anadditional 21 percent of villages with safe water, mainly through piped systems, the benefiting villagesshould include primarily villages grouped close to the county mean income level.

2. The actual NPV of the investment will vary from system to system, depending on actual villagerWTP, public health and social welfare externalities, and system economic costs. In none of the villagesvisited was water marketed by private vendors, nor was such marketing reported for other villages. Thiscomparator for direct valuation of water is therefore unavailable. In the absence of such a market, the useof a financial covenant for the water supply investment does set a base economic rate of return (ERR). Thecovenant requires that tariffs cover all operations and maintenance costs and the greater of depreciation ordebt service. Chinese regulations require a depreciation rate of 3.5 percent. The onlending rate to bepassed down by the Ministry of Finance is expected to be approximately 3 percent, with a 17-yearmaturity, so debt service will exceed depreciation for those years. Given that the standard conversionfactor for China is 1.0, major equipment and materials inputs are acquired through ICB, and no majordomestic input has an economic price above its financial price, a simple calculation shows that if thecovenant is met, the lower-bound ERR will be at least 3 percent. The actual rate will be higher in all casesas the calculation does not incorporate consumer surplus, nor does it reflect the fact that the actual tariffwill be set on a cost structure that includes the 17 percent VAT and other taxes and duties, as well asincorporating a return to government capital contributions in many counties. The government choice todirect scarce international resources to these villages gives evidence of significant positive public health orsocial welfare externalities additional to the private value of increased water supply.

3. The covenanted tariffs yield positive lower-bound ERRs, but do not match the established discountrate of 12 percent for Bank Group projects in China. The relative contribution of consumer surplustherefore becomes a key issue for economic evaluation. The demand curve for the improved supply

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depends very much on the original supply, which typically remains available. In almost all cases, somesubstitution of sources is possible. For the more common bacterial and viral contamination, boiling forsufficiently long periods can negate the problem and the trade-off between old supply and new becomes oneof the cost of fuel and tirne. These issues are stressed here because in some very low-income villages underRWSS, demand for improved water has not met expectations, with consequent reductions in economicreturns. Those cases are characterized by convenient, if unsafe, existing supply. There, villagers havemaintained or even increased overall consumption of water, but used the high-quality source only fordrinking and cooking. In those cases, at water tariffs above Y 1.5/m3, the new source may supply only 10to 15 liters/capita/day (lcd) of a total consumption exceeding 60 lcd.

4. The above discussion referred to substitution based on quality. A second source of difference iswater source location. Here, circumstances vary greatly across project counties. In some counties inHainan, Fujian, and Guizhou, for example, surface or shallow well-water sources tend to be convenient forall households, with no more than a five-minute walk to a source in all seasons of the year. There, theproblems are mainly those of water quality. In other project counties, however, access to raw water, evenwith existing wells, can be highly seasonal. During the rainy season, water, often of good quality, will beconveniently located. But during the dry season, and particularly in drought years, 40 minute or longerround trips for water are not uncommon. In these locations, then, the demand for improved water varieswith the season. Demand for improved supplies will be highly inelastic during the dry season, but veryelastic during the rainy season. Economic returns to new supply likewise vary across seasons.

5. Because convenience-the time required to obtain water from a particular source -is a majordeterminant of demand for improved supply, and because the impact on private demand is much morereadily analyzed than are other contributors to that demand, this analysis will focus on the time variable.The methodology for calculating the cost of time is well developed and that used here is based on thediscussion in " The Value of Time In Economic Evaluation of Transport Projects: Lessons from RecentResearch" (World Bank, Infrastructure Notes, OT-5, 1997). In this formulation, household income is usedto calculate the value of time used in pursuits that do not yield monetary income. For illustrative purposes,three project counties are used to show the implications of income levels for the cost of water collectedfrom unimproved sources (Table 1). The three serve as representatives of counties whose average annualnet rural per capita income fall in the lower, middle, and upper ranges of the 27 project counties (see Table2). The table has been constructed assuming very conservative values whenever a choice needed to bemade. For water gathering time, only 7.5 minutes per round trip is assumed for surface sources. Withhousehold wells, that is reduced to 4 minutes per round trip. Note that collection time from an improvedyard tap will not differ much from a household well, the difference coming in the time needed to lift out apail of water from a well, or pump out the same volume using a hand pump. One important factor notreflected in the table is the effort connected with the time spent. Clearly, the effort of filling a pail byturning a spigot is much less than lifting water from a well, even if the time needed for both isapproximately the same. Any adjustment to the cost for the effort of gathering water from the unimprovedsource would serve to increase that cost.

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Table 1: Cost of Water

Guizhou Anhui FujianNayong Qianshan PingheCounty County County

Annual per capita income (Y) 950 1,358 2,502

Average household size 4.3 4.1 4.2

Laborers per household 2.2 2.2 1.8

Annual household income (Y) 4,094 5,568 10,508

Assumed hours of work per year 7,260 7,260 5,940

Average income per hour (Y) 0.56 0.77 1.77

Daily water gathering time in hours, 0.5 0.5 0.54 trips/40 liters each (surface source)

Daily water gathering time in hours, 0.2 0.2 0.24 trips/40 liters each (household well)

Current labor cost/m3 (surface) 1.75 2.40 5.53

Current labor cost/m3 (household well) 0.70 0.96 2.21

Approximate cost/m3 of project safe water 1.5 0.9 1.5

Note: Water is typically collected using two 20-liter pails on a shoulder pole, so each trip collects 40 liters.

Table 2: Distribution of Project Counties' Annual Net Rural Per Capita Income

Average Annual Net Rural Per Capita Income Number of Counties

Y 950- 1,200 8

Y 1,201 - 1,400 7

Y 1,401 - 1,800

Over Y 1,800

6. The conclusion from the table is straightforward: a family currently served by a household wellsupplying water that will be safe after boiling will have little financial incentive to use improved watersupplies if time is the only factor. Either source is likely to be boiled, given the Chinese preference for

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taking drinking water in the form of tea. Only for counties in the higher income range does usage of pipedsupply provide cost savings. However, the cost of collecting water quickly exceeds the tariff for pipedsupply once the family must rely on sources outside their own compound. Even with a round trip of 7.5minutes, families at the average income of the lowest income county are indifferent between purchased andcollected supply. For counties in the middle and higher income ranges, improved supply becomes a veryattractive alternative to gathering water outside of the household vompound. Where raw water sourcescannot be easily treated to yield drinking water, families will readily carry drinking water over 20-minuteround trips, indicating a value for that water of at least Y 2.0/m3, even for the poorer families.

7. The analysis accords well with observed village participation in earlier projects. No database hasbeen assembled for those projects that can be used to characterize villages by their density of reliablehousehold wells. However, Bank supervision teams have now visited well over one hundred villages eitherparticipating in or proposed for participation in the Bank-financed rural water projects. In no supervisioncase has a village with reliable household wells chosen to participate. Rather, participating villagesregularly or seasonally face a substantial time burden for water gathering, or, more rarely, have currentsupply with arsenic or fluoride levels so high as to damage health. The same pattern of participation isexpected in this project and consistently generates rates of return well above the 3 percent financial floor.

8. The relative contribution of consumer surplus to the total private value of improved supply willdetermine the private ERR and NPV. The information in the above table also helps address this question.First, recall that when villagers choose whether to participate in the project, they know the approximatetariff levels. Villagers choosing to participate thus face costs for at least part of their supply that are asgreat as the projected tariff. These costs often include recapture of govermnent capital contributions, plustaxes and other fees on inputs, hence yield ERRs above the 3 percent covenant level. However, assumingthe worst case, that the tariff represents only a 3 percent lower bound for the ERR and that no real incomeincreases are expected over the project life, the consumer surplus would have to increase total value by 38percent over that captured in the tariff for the project to enjoy a positive NPV for the private demand (anypositive externalities to, say, public health, would further increase NPV). Any increase in real incomesover the project life would shift the demand curve (given the positive income elasticity of water demandshown in other China projects) to the right and further increase the consumer surplus. Based on the watercollection time cost in the above table, in the better off among the poor counties (examples shown for casesin Anhui and Fujian), for villages without reliable household supply, water costs are cut by more than halfand consumer surplus will therefore easily exceed the 3 8 percent level. The Guizhou case is less clear.Under the most conservative assumption about the demand curve, and assuming that villagers attributevalue only to time savings, the additional consumer surplus would increase total benefits only 17 percent,yielding an ERR of about 8 percent. Although the project clearly faces the risk that villages with positiveERRs but negative NPVs will elect to participate, this risk arises only with the poorest participatingvillages when they already enjoy supply within an average 7.5 minute roundtrip from the household.Supervision experience suggests that the poorest villages typically suffer the longest, not the shortest,distance from reliable supply, hence the risk is deemed manageable. For the higher-income poor counties,even a 7.5-minute round trip justifies project participation.

9. Sensitivity Analysis. Given that nearly 500 piped systems will be constructed under the project, awide array of actual ERRs is anticipated. The economic test is to realize a positive NPV, not maximizethat NPV over the project. As the time value chart shows, maximizing private NPV would generallyinvolve selecting higher-income villages in preference to lQwer-income as project beneficiaries. Thisselection bias against serving the poor occurs in any project in which time value plays a crucial role indetermining returns. Indeed, to overcome this problem in transport projects, the "Infrastructure Note" citedabove recommends using average national time values, rather than location-specific values, to avoid biasing

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road investments toward wealthier areas. That works as a political selection mechanism, but is notdefensible in terms of ERR or NPV calculations. In this project, the tariff provides a self-selectionmechanism that guards against projects with negative NPVs. As the time value calculations show,economic returns from projects meeting the tariff covenant have a very high probability of yielding apositive NPV. Indeed, where existing water sources are distant or untreatable to safe standards, the ERRwill be well above 12 percent and the NP-Y well above zero.

10. The argument in the foregoing paragraph relies on accurate forecasting of demand at each village,so that the consumers use, and pay for, sufficient water to actually cover the enumerated costs. Experiencein the previous projects makes it clear that designers usually correctly estimate use rates. However, somecounties have shown a tendency to design for and construct excess supply, on the theory that economicgrowth, hence incomes and commercial and industrial demand, will proceed at a rapid pace. This issuetherefore was the subject of considerable scrutiny during the appraisal process. The appraisal missiondeemed the best proxy for system demand to be demand for similar systems in adjoining areas within acounty. Where such evidence could not be found, or comparable systems had markedly lower tariffs,CPOs have been asked to undertake additional analysis to justify their choices.

11. A second requirement if the willingness to pay the financial tariff is to capture economic value isthat the villagers perceive that they will be required to repay the loan on schedule. If, instead, they believethat the loan contract is unenforceable, the project would face a familiar moral hazard through villagerssignaling a willingness to pay for a higher level service than they are actually willing to fully pay for. Thefirst rural water supply project has not experienced this problem, while the second is just entering therepayment period and thus provides scant evidence. That said, the concern is not simply hypothetical,given the widespread publicity in China about SOE failure to repay loans and the lack of effectivesanctions on them.

Sanitation and Health Education

12. The value of safe water supplies can be negated by a failure to follow good health and sanitationpractices. For example, food preparers who have not washed their hands can easily contaminate the waterafter it leaves the tap. Unfortunately, while affordable physical investments can solve many of the waterquality problems, the behavioral change needed for good health and sanitation practices is much harder toinduce. For decades, the Chinese NPHCC has run health education and action campaigns targeting a broadarray of rural health problems. They achieved early successes that included reduction of schistosomiasisand insect-borne diseases, both cases where disease vectors were easy for rural people to identify. NPHCChas also worked on a number of important sanitation interventions, including boiling water; latrine use,particularly composting latrines that promise high rates of pathogen destruction; and hand washing. Theyreport success in spreading knowledge of good practice, and Bank preparation and supervision missionshave rarely met an adult who hadn't heard of the importance of boiling water. However, in many poorvillages those same adults report frequent consumption of unboiled water, especially in the summer and byyoung children.

13. Latrine use rates are high, at over 90 percent, reflecting an ancient concern with capturing fecalmaterial to fertilize crops. A total of 57 percent of rural households have composting latrines; theircoverage has grown rapidly in recent years. Not surprisingly, Chinese surveys have consistently shown ahigh correlation between handling untreated fecal material and intestinal and other illness. For the lastthree decades, government has worked to identify treatment methods that substantially reduce pathogentransmission. A number of latrine designs, when properly used, have been shown to massively reduce thenumber of pathogens. However, compared to the simple traditional designs, such latrines require

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purchased inputs and unfamiliar construction techniques. Cost, which can easily amount to a year's percapita income in poor villages, and the lack of a proven health benefit have slowed adoption.

14. Unlike water supply under the RWSS project, the WTP for improved sanitation under RWSS hasbeen well below the private cost of latrine construction. Even in villages with high subsidies for theconstruction of private composting latrines, uptake rates have been low. This correlates with national andinternational experience with improved sanitation-everywhere the private demand for sanitationsubstantially lags that for improved water supply. Were this project to seek rapid advance in installingimproved latrines, project design would need to be bimodal, in the sense of working with relatively wealthycounties on the sanitation issue, for that is where sanitation WTP will be highest. However, experienceunder RWSS suggests that such an approach would over stretch the administrative capacity of provincialproject offices and the disconnect between the water and sanitation issues would hinder overallimplementation. Instead, the project will have lower expectations of sanitation than of water supply,proceeding in a cautious and experimental manner toward expanded use.

15. In the context of preparing this project, a viable benefit estimation procedure for the sanitation andhealth education components has not been identified. The methodology is certainly known, but involvessophisticated epidemiological work for which the needed data are not at hand and for which the cost cannotbe justified. In the absence of such a test, the project seeks to lower the cost of improved sanitation throughthe provision of technical assistance in design and to increase private demand through demonstrating thetechnology to villagers. Even in the absence of an adequate rationale for subsidizing private sanitationfacilities, such a rationale does exist for improved school latrines. School health education courses, whichhave demonstrated a substantial positive impact on health, lose effectiveness if taught in an environmentwhere students cannot practice the skills they are being taught. Quite apart from the project concerns,inadequate sanitary facilities are also known to discourage school attendance by girls of some age groupsor ethnicity.

16. The project will begin to overcome, however modestly, the gap in NPHCC's knowledge of theimpact of their work. The baseline studies fnanced by the project will, for the first time, permit direct andsystematic estimation of project impacts. The studies provide the basis for adapting program content toresults over and past the life of this project.

Typical Costs

17. Water supply costs vary depending on the available sources of raw water, their location relative tothe served village(s), and treatment levels needed to assure safe supply. Those costs are village-specific.But costs also vary with the choice of delivery level (standpipes, household connections, continuous orintermittent supply). Those costs are household-specific. Where villages elect to build systems allowinghousehold connections, households have the option of seeking household connections or not. Those thatelect such connections in the first year of project construction will have part of those costs eligible forfinancing under the loan/credit. Households electing to connect in later years will bear the full direct costof such connections.

18. The feasibility studies on first-year proposed systems yielded estimated operations costs andprojected tariffs. The system cost estimates for the first-year construction program are based on accuratebills of quantity. The inputs are all locally available, hence prices are reliably known. Furthermore, the -

projections can be validated against costs experienced in the ongoing NRWS project. Based on the

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feasibility studies, the project shows the following range of costs per cubic meter of delivered water:

Table 3. Distribution of Expected Tariffs by Province

Province Piped supply(Y/m3)

Anhui 0.65-1.30

Fujian 0.52-1.80

Guizhou 1.50-2.80

Hainan 0.70-1.22

19. These figures are comparable to those under NRWS. Urban residents typically pay much less fora more reliable water supply, with rates ranging from about Y 0.4/m3 to Y 0.8/m3. Lower urban priceshave two main causes. First, their water pricing is based on the depreciated, historical value of capital andmany of the systems are at least a decade old. Second, urban governments have traditionally subsidizedmany of the investment costs, which were then not used in the price basis for the system.

Poverty Analysis

20. The beneficiaries under the project are located within some of China's poorest communities.Accordingly, offering low-cost water supply options and a means of financing them through the watertariffs are key to the affordability of these systems. Beyond this, communities selected for inclusion in theproject must demonstrate the willingness and ability to pay for safe and convenient water supplies bycollecting beneficiary investrnent contributions prior to commencement of construction. In the selection ofproject counties, local per capita income information was analyzed. The anticipated water tariffs were thencompared against the average income figures, which range from Y 950 to Y 2,787 per capita per year. Inthe highest case, annualized water fees are expected to represent 5.7 percent of beneficiary income, and inmost cases less than 3 percent. Asset holdings are unknown and the burden of making the capitalcontribution difficult to analyze. Here, though, the willingness to contribute is immediately tested andfound to be high. In the ongoing NRWS project, beneficiaries have continually shown a willingness to paythe cost of their water supply.

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21. Preliminary estimates suggest the following levels of tariff as a percentage of villager income:

Table 4. Water Costs as a Percentage of Villager Income, Distribution Range by Province

Province Estimated percentage of villager income neededto purchase water at estimated use levels of the new system

(lowest and highest county)

Anhui 1.2 - 2.3

Fujian 0.5 - 1.8

Guizhou 2.1 - 5.7

Hainan 1.3 - 2.5

22. A critical affordability issue is not average affordability, but rather affordability by the poorermembers of the village population. The poorest villagers will have insufficient cash income to contributecapital during the construction phase or pay tariffs during implementation. Some substitution of labor andmaterials for capital is possible, but studies show that the poorest are often so because they are tooincapacitated to join fully in the working life of the village. In every village interview addressing this issue,village leaders noted the existence of such households (indeed, the formal rural social welfare system isstructured around identified poor households). These households are termed "five guarantee households,"are primarily found among the childless elderly, and consistently numbered no more than 1 percent of thepopulation in villages visited by the preappraisal mission. Fellow villagers are legally obliged to providethese households with a stipulated array of subsistence support, and village leaders consistently reportedthat the village would ensure access to safe water on behalf of the poorest village members. In some cases,the village welfare fund will cover the costs of the poorest. In others, common use, umnetered standpipeswill be part of the system and accessible to all village members. While such households are unlikely to beoffered household connections at communal expense, basic availability of safe water will be ensured.

23. Perhaps those at greatest risk will be those households that have incomes just above the levelneeded for special village poverty status. Such households will be able to control their own meteredconsumption, whether at household tap or standpipe, but most villages plan to assess the capitalcontribution on a per capita basis rather than an estimated use basis. Families with low per capita use willtherefore effectively subsidize those with higher use levels. However, as with other project issues,experience under the previous projects provides good guidance on this issue. Under those projects, accessby the poorer villagers has not been a serious problem, so it is unlikely to be so under this one.

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Annex 5: Financial Summary

CHINA: Fourth Rural Water Supply and Sanitation Project

Years Ending2005

Year I Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Total Financing RequiredProject CostsInvestment Costs 9.9 22.8 25.9 19.6 8.2 0.0 0.0Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Costs 9.9 22.8 25.9 19.6 8.2 0.0 0.0Interest during 0.1 0.7 1.2 1.6 1.8 0.0 0.0

constructionFront-end fee 0.2 0.0 0.0 0.0 0.0 0.0 0.0

Total Financing 10.2 23.5 27.1 21.2 10.0 0.0 0.0

FinancingIBRD/IDA 9.1 10.6 10.9 8.7 6.7 0.0 0.0Government 0.6 6.5 8.1 6.2 1.7 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.6 6.5 8.1 6.2 1.7 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.6 6.5 8.1 6.2 1.7 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 10.2 23.5 27.1 21.2 10.0 0.0 0.0

F Year I Year 2 Year 3 1 Year 4 1 Year 5 Year 6 1 Year 7Total Financing RequiredProject Costs

Investment Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0Interest during construction 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Front-end fee 0.0 0.0 0.0 0.0 0.0 0.0 0.0Total Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0

FinancingIBRDIIDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0Government 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Central 0.0 0.0 0.0 0.0 0.0 0.0 0.0Provincial 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 0.0 0.0 0.0 0.0 0.0 0.0 0.0

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Main assumptions:Figures for Year 1 include those for 1999 and 2000.Figures listed under Provincial Government also include financing from Prefectural, County, Township and/orLocal Governments.Figures may not add up properly due to rounding.

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Annex 6: Procurement and Disbursement ArrangementsCHINA: Fourth Rural Water Supply and Sanitation Project

Procurement

Procurement of works and goods will follow the Bank's Guidelines - Procurement under IBRD Loans andIDA Credits dated January 1995 and revised January and August 1996, September 1997, and January1999. Chinese Model Bidding Documents (including prequalification and bid evaluation documents),published by Tsinghua University Press, dated May 1997 and which are acceptable to the Bank, or theBank's Standard Bidding Documents, will be used for all Bank-financed procurement. A ProcurementPlan, providing a timeline for each step of the procurement process, is included in the PIP, to be updatedannually.

All consultancy services financed by the Bank will be based on the Guidelines for Selection andEmployment of Consultants by World Bank Borrowers, issued in January 1997 and revised September1997 and January 1999. Normally the Quality- and Cost-Based Selection (QCBS) method will be used forthe selection of consulting firms. Consultancy services estimated to cost less than $100,000 per contractmay be selected using one of three methods: (a) selection based on consultants' qualifications; (b) singlesource selection; and (c) individual consultants. Services in which selection based on consultants'qualifications is used and which are estimated to cost less than $100,000 equivalent per contract shall beprocured in accordance with the provisions of paragraphs 3.1 and 3.7 of the Consultant Guidelines.Services in which single source selection is used and which are estimated to cost less than $100,000equivalent per contract may, with the Bank's prior agreement, be procured in accordance with theprovisions of paragraphs 3.8 through 3.11 of the Consultant Guidelines. Services for the study ofprocurement document review which meet the requirements set forth in paragraph 5.01 of the ConsultantGuidelines shall be procured under contracts awarded to individual consultants in accordance with theprovisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines.

All ICB procurement will be organized through the China National Chemical Construction CompanyInternational Tendering Company (CNCCCITC), which has been contracted by the NPO to carry out thatwork. CNCCCITC is an experienced and competent procurement agent with recent and relevantexperience in international competitive bidding on Bank/IDA-financed projects. All other procurement willbe conducted by the project offices. Intensive, continuous procurement training financed under the projectwill help these offices maintain their quality and expertise. The tender documents to be used in the projectwill be based on the model bid documents prepared by MOF and approved by the World Bank Group. Allcivil works are expected to have a value well below $10 million; therefore no ICB procurement of civilworks is anticipated. Contracts for equipment and materials shall be grouped into packages estimated tocost the equivalent of $200,000 or more each, to attract maximum international competition. Table Asummarizes the procurement categories and the expected procurement methods. The contract packages andmethod of procurement have been agreed with the NPO.

Procurement methods (Table A)

Civil Works. The total value of civil works is estimated at $41.1 million. These include water supplyfacilities (wells, pumphouses, treatment facilities, distribution systems, offices, latrines, and storage areas),latrines under the sanitation component, and some county warehouses (where suitable rental facilities arenot available). Because even the largest systems would have total investments below $1 million, with mostsystems below $200,000, and because of their dispersed locations, all civil works will be contracted by

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national competitive bidding (NCB), national shopping or force account. Of the total $37.6 million forcivil works, it is expected that $12.2 million will be procured under NCB. Contracts with estimated valuesabove $400,000 will be contracted by the PPOs following the NCB procedures promulgated by thegovernment that have been reviewed and approved by the World Bank Group. Interested foreign bidderswill be allowed to bid for NCB contracts. For contracts with estimated values below $400,000 (i.e. for theprocurement of small works), project offices may use national shopping as an alternative to NCB. Innational shopping, the project office uses clear, uniform written specifications, including delivery terms andconditions, to obtain bids from at least three qualified contractors. For contracts with estimated values ator above $100,000, the PPO conducts the shopping and qualified bidders must be from at least twodifferent counties. For contracts with estimated values below $100,000, the CPO may conduct theprocurement. National shopping can be used for contracts up to an aggregate value of $25 million.Included in this amount, force account may be used to procure civil works valued at or below $20,000 inareas where there is no adequately qualified or interested contractor. The aggregate value of force accountprocurement shall not exceed $4 million. Usage of force account for the procurement of civil works issubject to the Bank's prior agreement.

Equipment and Materials. Procurement of major items of equipment and materials-pipes, steel andpumps, along with audiovisual training equipment and utility vehicles-amounting to about $39.1 millionwill be through ICB, managed by the NPO on behalf of the project provinces. CNCCCITC will act as theprocurement agency. Qualified domestic suppliers will be eligible for a preference in bid evaluation of 15percent or the prevailing rate of customs duties and import taxes payable by a nonexempt importer,whichever is less. That equipment and materials will be procured through annual procurement actions.Additionally, the project will procure printed and audiovisual sanitation and health education materials,with each package valued under $100,000. These materials will be procured through national shopping, upto a maximum of $500,000. No NCB equipment and materials procurement is anticipated. Any neededequipment and materials not procured through ICB or national shopping will be procured as part of theappropriate civil works contract.

Technical Assistance. An estimated $3.6 million will be devoted to technical assistance and training. Theproject requires a baseline survey and resurveys to establish project impacts. These surveys have anestimated cost of $0.2 million. The project also relies on an extensive training program to ensure efficientimplementation, with an estimated cost of $3.4 million. The Bank has worked with the borrower toestablish both total costs and unit costs for the survey and training activities. Within the unit costs, theBank has identified incremental costs of different types of surveys and training, defined as the direct costsof the activity, net of government employee salaries and institutional overheads. These incremental costsaverage 90 percent of total costs. The Bank would disburse against 100 percent of the eligible incrementalcosts. Eligibility would be established through Bank no-objection to the detailed survey and training plans,as these are developed and reflected in the annual work program.

Prior review thresholds (Table B)All equipment and materials ICB packages (about 5 contracts, 100 percent of equipment and materials)would be subject to the Bank's prior review, including notice of invitation to bid, bid documents, bidevaluation and contracts. Project civil works will include some 479 piped systems with an average civilworks contract value of about $130,000, 147 deep-well hand pumps with an average value of under$2,600, and 120 rainwater collectors, with an average value below $200. For civil works contracts, thefirst piped system contract from each project county (27 contracts), and thereafter approximately 10randomly designated contracts per year, will be subject to the Bank's prior review. Also, the first NCBcontact from each project county will be subject to the Bank's prior review. The high cost of prior reviewrelative to contract value necessitates the low prior review percentage. Aggressive post-review, with all

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contracts. in any given county post-reviewed during supervision mission visits to the county, will provide astrong incentive for good performance. An estimated 20 percent of piped system contracts will be subjectto post-review.

All good contracts to be procured using ICB will be subject to the Bank's prior review. Also subject toprior review are the first contract for goods for health education in each project province (4 contracts).

The threshold for prior review of contracts for consultants will be $100,000 equivalent for firms and$50,000 for individual contracts. For contracts below the threshold, prior review will apply to terms ofreference above the thresholds noted above, single-source selection, assignments of a critical nature, andany amendments that would increase the original amount of the contract by more than 15%. Othercontracts will be subject to selective post-award review. (Please note that given the nature of this project,the thresholds for procurement are not monetary, with the exception of consultancy services. Therefore,Table B has not been included.)

Disbursement

Allocation of loan proceeds (Table C)The proposed IBRD loan of $16 million and IDA credit of $30 million would be disbursed over a period ofabout five and a half years, matching the original disbursement period under the second and third ruralwater supply project. This disbursement period is considered sufficient because implementation risks aremitigated by (a) 10 percent of the five-year investment program being prepared to fnal design level prior toappraisal; and (b) planning annual ICB procurement, thereby avoiding the bunching problems found in thesecond project. Civil works disbursement rates vary across provinces to reflect the different level ofequipment and materials procured through ICB. Provinces with high civil works disbursement rates haveless complex systems and higher rates of contractor-supplied materials.

Use of statements of expenditures (SOEs):

Disbursements will be made against statements of expenditure (SOEs), confirmed by the NPO, for: (a)contracts for (i) civil works valued at less than $2.5 million; and (ii) equipment and materials costing lessthan $0.5 million equivalent; (b) contracts for consulting services costing less than $100,000 equivalent forfirms and $50,000 equivalent for individuals; and (c) training, study tours, and incremental costs (i.e. thecost of travel, accommodation, meals, and printing of survey materials) incurred by CPOs in connectionwith training and the carrying out of surveys. Documents supporting the SOEs will be retained by MOFand made available for inspection during the course of Bank supervision missions and by external auditors.All other disbursements will be made against fully documented expenditures.

Special account:To expedite disbursements, four Special Accounts (one in each project province) will be established. Theauthorized allocation for the account will be decided at negotiations, but it is expected to be in the range ofabout four months' average disbursements. The accounts will be replenished monthly or whenever theSpecial Account is drawn down to 50 percent of its initial value, whichever occurs first.

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Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

1. Works 0.0 15.7 20.7 4.7 41.1(0.0) (7.5) (7.7) (0.0) (15.2)

2. Goods 35.6 0.0 0.0 0.0 35.6(26.7) (0.0) (0.0) (0.0) (26.7)

3. Services 0.0 0.0 4.1 0.0 4.1(0.0) (0.0) (3.9) (0.0) (3.9)

4. Miscellaneous 0.0 0.0 0.0 5.6 5.6(0.0) (0.0) (0.0) (0.0) (0.0)

5. Interest during 0.0 0.0 0.0 5.4 5.4construction

(0.0) (0.0) (0.0) (0.0) (0.0)6. Front-end fee 0.0 0.0 0.0 0.2 0.2

(0.0) (0.0) (0.0) (0.2) (0.2)

Total 35.6 15.7 24.8 15.9 92.0(26.7) (7.5) (11.6) (0.2) (46.0)

" Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies21Includes civil works and goods to be procured through national shopping, consulting services, services of

contracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to (i) managing the project, and (ii) re-lending project funds to local govermnentunits.

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Table C: Allocation of Loan Proceeds

Civil Works 15.1 Anhui: 41 percent of expendituresFujian: 44 percent of expenditures

Guizhou: 39 percent of expendituresHainan: 43 percent of expenditures

Goods, Equipment, 26.8 100 percent of foreign expenditures,Materials 100 percent of local expenditures

(ex-factory, net of VAT), and 75percent of other items procured

locally

Training and Study Tours 2.0 100 percent of incrementalexpenditures

Consultant Services 0.4 100 percent of expendituresIncremental Costs 1.5 100 percent of expendituresUnallocated 0.0

Total Project Costs 45.8Interest during 0.0

constructionFront-end fee 0.2

Total 46.0

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TABLE D: Schedule of Disbursements

Bank fiscal year IDA/IBRD Cumulative ($ Project RWSS2 China Profileand sememster ($ million) million) Profilel/a Profile /b /c

2000

First Id 2.0 2.0 4.0 6.0 0.0

Second 4.3 6.3 14.0 15.0 3.0

2001

First 2.8 9.1 20.0 24.0 26.0

Second 5.6 14.7 32.0 33.0 26.0

2002

First 5.0 19.7 43.0 46.0 38.0

Second 5.8 25.5 55.0 60.0 42.0

2003

First 5.1 30.6 66.0 69.0 62.0

Second 5.5 36.1 78.0 78.0 82.0

2004

First 3.2 39.3 88.0 85.0 86.0

Second 3.5 42.8 93.0 93.0 98.0

2005

First 2.3 45.1 98.0 97.0 98.0

Second 0.9 46.0 100.0 100.0 100.0

/a_This is the same disbursement profile as that for NRWS3 (Cr. N0270-CHA)./b Disbursement profile for Rural Water Supply and Sanitation Project (Cr. 2336-CHA).

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Lc Disbursement profile for China (water and sanitation sector) issued August 1995./d Includes initial Special Account disbursement.

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ChinaFourth Rural Water Supply and Sanitation Project

Review of Financial Management SystemFebruary 1 -12, 1999

I. Background

1. Scope/Objective of Review of Financial Management System. This report is the result of afinancial management review and analysis of the project as conducted by Junxue Chu, FinancialManagement Officer, EACCF and Nancy Chen, Financial Management Specialist, EAPCO. The scope ofwork has been set out in the 'Review of Financial Management System' as documented in the LACIHandbook, Annex 2. The objective of the review is to determine whether the project has in place anadequate financial management system as required by the Bank in OP/BP 10.02.

2. Project objective. The objective of the proposed Fourth Rural Water Supply and Sanitation Project(FRWSS) is to reduce the time and cost for people in poor rural areas to obtain clean, safe water supply,while improving related sanitation and health behaviors through education and pilot investments. Theprinciple objective is to provide access to safe, conveniently located water to 3.1 million poor rural peoplein Anhui, Fujian, Guizhou and Hainan provinces, and to improve related water and sanitation practices.Key project performance indicators will be: (a) number of villages newly served by project-supplied watermeeting national rural water quality standards; (b) number of improved latrines constructed in villages inthe project counties and percentage point improvement compared to the baseline period in key water-relatedhealth behaviors; and (c) water charges sufficient to cover water systems operations and maintenance, anddepreciation or loan/credit repayment.

3. Project status. The project is currently at pre-appraisal stage, scheduled for negotiation on April12, 1999 in Beijing and submission to the Board in June 15, 1999. Implementation of the project isscheduled to run from June 1999 to June 2005.

II. Organizational Structure/Institutional Arrangements

4. Organization Chart (Attachment I). The overall responsible agency for the project is at theNational level: National Project Office (NPO). Project implementation will be undertaken at the provincial,county and township level. In terms of project administration support, project management offices havebeen established in each individual province (PPO) and county (CPO). The financial accounting andreporting aspects of the project are to be handled by the national, provincial and county projectmanagement offices.

Each of the four provinces will have its respective Financial Bureau - ' World Bank Division' to manage,monitor and reconcile its Special Account, check and monitor withdrawal applications (WA) and to verifypayment requests meet Bank requirements.( See VI for detailed discussion of Special Account,disbursements and supporting documentation.) As the Special Accounts are only accessible to and managedby the Provincial Financial Bureaus, cash management is segregated from project administration which isconducted at the PPOs and CPOs.

Each of the PPOs and CPOs is expected to maintain supporting documentation and is responsible forconsolidated project level reporting at each appropriate level.

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5. Institutional experience with Bank-Financed Projects. NPO was established to manage the SecondRural Water Supply and Sanitation Project. NPO, Provincial and County Finance Bureaus have hadsubstantial previous experience with Bank financed projects and therefore are familiar with the existingdisbursement, procurement, financial reporting and auditing requirements. However, the PPOs and CPOs(both Provincial and County levels) are new to working on/with Bank projects. Training on financialmanagement will therefore be arranged primarily focusing on PPO and CPO staff (see Section VII fordetails). However, the counties involved all have previous experience with Bank fmanced projects (e.g.Health IV, Health VI and Intensive Irrigation Project).

III. Project Structure and Category

6. Financing and Cost Sharing. The financing of the project will be supported by IBRD (US$ 16 M),IDA (US$ 30 M) and Government financing (US$ 46 M) for a total estimated project cost of US$ 92 M.

7. Loan Agreement Categories. These will include: civil works, goods, consultant services, trainingand incremental costs. Each of the categories is broken down by Province.

8. Project Components. The project is comprised of the following three components:

a. Water Supplyb. Health Education & SanitationC. Project Management

IV. Internal and Other Controls

9. Project Financial Management Systems Manual. The objective of this Manual is to document theoperational procedures and guidelines for project financial management encompassing all levels of projectmanagement (i.e. National, Provincial, County and Participating Agencies). The scope of the Manual willencompass financial management infrastructure and staffing (e.g. organization chart and job descriptions),identification of the accounting standards to be used by the project and all participating entities, projectreporting formats and procedures for cash management, asset management, procurement anddisbursements, counterpart fund management, budgeting and auditing. In terms of status, a template of thisManual has been provided to the NPO who will be responsible for drafting the Manual as well as thesummary version to be attached to PIP. The summary version of the Manual is scheduled to be prepared onor before March 1, 1999, and the Manual will be available before negotiations.

10. MoF/Provincial Regulations. The administration, accounting and reporting of the Project arerequired to be set up in accordance with the following regulations/circulars as issued by the Ministry ofFinance:

a. Circular #6 "Temporary Regulations on Financial and Accounting Management forProjects Financed by the World Bank" as issued by the World Bank Department of the Ministry ofFinance in January 1997.

b. Circular #127: "Temporary Regulations on Accounting and Reporting for ProjectsFinanced by the World Bank" issued in 1993 - provides the basis of accounting treatment for projectactivities and guidelines for project fmancial management. Although it is outdated, the chart ofaccounts designed by this Circular for use by Bank projects is still in effect.

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c., Accounting Law issued January 1985 with subsequent amendments - includes jobresponsibilities for cashiers and accountants and financial management recording and reportingrequirements.

d. MoF Agreement - An agreement has been reached by MoF on a standard set of financialstatements to be used for World Bank projects. This agreement outdates the previous MoF Circular#6: "Temporary Regulations on Financial and Accounting Management for Projects Financed by theWorld Bank" issued January 1997. The format of the financial statements included in this MoFAgreement package is primnarily based on the construction accounting standard noted in 11. below.

11. Standards. The Construction Accounting Standard issued by Accounting Departrnent, MoF forconstruction oriented projects dictates the format of financial statements, chart of accounts and relatedinstructions. As noted above, this standard will affect project accounting and reporting requirements.

V. Project Accounting Standards, Financial and Management Reporting

12. Accounting standards. The accounts will be prepared in accordance with the Circulars noted insection IV. above on an accrual accounting, double entry bookkeeping basis in accordance with Chineseaccounting standards, including the above-noted construction accounting standard.

13. Project Reporting. Clearance has been received from MoF on a standard set of project financialstatements which will be utilized by this project. In terms of reporting cycle, the project financialstatements will be submitted to the Bank bi-annually, in a project consolidated form, and include thefollowing: (a) Balance Sheet; (b) Sources and Uses of Funds by Project Component; (c) Statement ofImplementation of Loan Agreement; (d) Statement of Implementation of Credit Agreement; and (e) SpecialAccount Reconciliation Statement. Each of the project management offices will be managing, monitoringand maintaining their respective financial reports. Project level consolidation will be done by theAccountants at the Provincial and National levels.

14. Counterpartfunding. Counterpart funding is to be provided by the following: (a) provincial,prefecture and county financing of US$23 M; and (b) beneficiary financing, in cash and in-kind, of US$ 23M. The RMB equivalent value of the loan will be estimated on a purchasing power parity basis, and thesum of counterpart funding commitments will be expected to at least match the loan value in those terms.

VI. Special Account, Disbursements and Supporting Documentation

15. Special Account. Each of the four provincial Financial Bureaus will manage, monitor andmaintain its respective Special Account. Corresponding USD accounts for Special Account relatedtransactions will be held at the Prefecture (with the exception of Hainan Province where the Prefecture levelwill not be involved) and County level Finance Bureaus, acting as a channeling agent to transfer funds fromthe Provincial Special Account through to the township level. A proposal for a Special Account at theNational level, for disbursements controlled by the NPO, is being discussed between NPO and MoF.

16. Disbursements and Supporting Documentation. The original copy of WAs and supportingdocumentation will be initially retained at the point of initiation, primarily the participating agencies, thentransferred to CPOs for record keeping. A copy of WA and the supporting documentation will be requiredand retained at the Financial Bureau for amounts exceeding the SOE threshold.. Disbursement applicationprocessing will take two months of processing time from Participating Agency to Provincial Finance

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Bureau. (This point will be addressed in the FMS manual).

VII. Staffing and Training

17. Staffing. As noted in Section II, though the NPO and the Provincial Finance Bureaus areexperienced with Bank projects, the PPOs and CPOs do not have experience with prior Bank projects andtherefore may be unfamiliar with Bank procedures. The accountants at both the PPOs and CPOs are newto Bank projects; however, discussions with the project staff indicated that the accountants all have prioraccounting experience. In terms of the status of hiring, at present, the NPO is fully staffed; accountants atthe Provincial and County levels are being hired for the duration of the project implementation.

18. Training. It is suggested, as many PPO and CPO staff are new to Bank projects, that trainingshould be arranged for all project management offices and Participating Agencies on the following: (a)Bank procedures and requirements on the withdrawal of Bank funds; (b) the newly revised project financialstatement formats; (c) performance indicator and procurement reporting requirements; and (d) project auditrequirements.

VIII. Audit Arrangements

19. The Bank requires the Project to have its project financial statements audited in accordance withstandards acceptable to the Bank. It is anticipated that the National Audit Office and its branch will befound acceptable by the Bank for the purposes of auditing project financial statements. The audit reportswill be scheduled for submission to the Bank within 6 months after the end of the calendar year.

IX. Budgeting

20. The annual budget will be prepared by respective CPOs and reviewed, consolidated and approvedby the County level Finance Bureau prior to submitting to PPOs. PPOs will review, consolidate andapprove the budget prior to submitting to the Provincial Finance Bureau, who after the review andapproval, will submit it to NPO. Procedures used in the budgeting process are expected to be detailed inthe financial management systems manual and serve as a guide for all parties involved.

X. Issues/Next steps

21. Financial Management Systems Manual. As noted in Section IV, a summary version of themanual is being prepared by the NPO. It will be submitted for review by the Bank financial managementstaff on or before March 1, 1999. It has been agreed by the NPO that a draft Manual will be provided forreview and commnent by the Bank financial management staff on or before April 2, 1999, and the Manualwill be finalized before negotiations. It has also been agreed by the NPO that each PPOs will revise theManual to suit its own financial management system by loan effectiveness. Discussions with the projectstaff indicate that at both NPO and Finance Bureau, there is a lack of segregation of duties for bookkeepingand cash custody; in other words, the individual is both an accountant and cashier. NPO has agreed thatincompatible functions should be separated at all levels or in any event that reality does not allow sufficientsegregation of duties or such segregation renders operation impractical or unrealistic, secondary controls(such as review by another higher-level staff) will be in place to fill in the gap.

22 Allocation of common costs. Discussions with the project staff indicate that certain common costssuch as training, incurred at the National and Provincial level, would be allocated to the County level.Such costs once allocated, would be recorded in the County level sub-ledger and therefore would not

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appear in the respective books at the National and Provincial level. Thus it is imperative that commoncosts be defined and addressed in the on-lending agreement.

23. Foreign Exchange Risk. Although MoF agreed that provincial governments will assume theforeign exchange risk connected with loan repayments, currently PPOs are not sure who will bear suchrisk, i.e. township or counties. This issue needs to be resolved between the MoF and the Provincialgovernment and addressed in the on-lending agreement.

24. Training. NPO has agreed to provide training to all levels of the project financial managementstaff and Participating Agencies, and to invite National Audit Office staff ( NAO) to participate in thetraining, on the following: (a) Bank procedures and requirements on the withdrawal of Bank funds; (b) thenewly revised project financial statement formats; (c) performance indicator and procurement reportingrequirements; and (d) project audit requirements. The training is expected to be conducted in June 1999.

25. Staffing. As soon as the hiring is completed, a listing of new Accountants /DOs should beprovided for the Bank financial management staff for review of the background, qualifications andexperience.

26. Quality of Project Accounting Records. Since the bulk of the activities will take place at thetownship level whilst the accounting records (i.e. sub-ledgers and original vouchers ) will be transferred toand maintained at the County level for bookkeeping and Bank supervision missions, there is a concern forthe completeness and accuracy of the accounting records being transferred to the CPOs, who areresponsible for the recording and maintenance of accounting information. This situation will need to beaddressed as a priority during the training and supervision missions.

27. Competence of County Audit Office staff. Discussions with a Provincial Audit Office staffmember indicates that County Audit Office staff in general do not have as good credentials as theProvincial Audit Office staff. A training course on Audit Manual was provided to the NAO in August1998 by PricewaterhouseCoopers. The Bank should consider having NAO provide training to itsprovincial and county level staff.

XI. Conclusion

28. Pending addressing the issues noted above, the financial management team has determined that theproject will be satisfying the Bank's fnancial management requirements as required by OP/BP 10.02. Theproject will be disbursing based on the traditional disbursement techniques and will not be usingPMR-based disbursements, in accordance with the agreement reached between the Bank and the ChinaMinistry of Finance.

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Annex 7: Project Processing Schedule

CHINA: Fourth Rural Water Supply and Sanitation Project

Time taken to prepare the project (months)

First Bank mission (identification) 10/14/98 10/14/98Appraisal mission departure 03/29/99 03/24/99Negotiations 04/12/99 04/12/99

Planned Date of Effectiveness 09/15/99

Prepared by:

National Patriotic Health Campaign Committee, China Water Supply and Sanitation National ProjectOffice

Preparation assistance:

Japanese PHRD Grants

Bank staff who worked on the project included:

Task TeamGeorge Plant (Team Leader), EACCF Engineering/TechnicalDawn Vermilya, EACCF FinanceMark Wu, EACCF Operations/EconomicsXiaofeng Li, EACCF OperationsLee Travers, TWUWS Economics/EnvironmentPing Huang (Consultant) Health, hygiene, and sanitation educationAi Chin Wee, WSP ParticipationChongwu Sun, EACCF EnvironmentJunxue Chu, EACCF DisbursementMargaret Png, LEGEA LegalNancy Chen, EAPCO Financial Management AssessmentJinan Shi, EACCF ProcurementYoulan Zou, EACCF Resettlement

Peer ReviewersCaroline van den Berg, LCSFP EconomicsRichard Pollard, WSP Rural water/SanitationBrian Smith, ECSIN Finance

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Annex 8: Documents in the Project File*CHINA: Fourth Rural Water Supply and Sanitation Project

A. Project Implementation Plan

Project Implementation Plan (PIP), May 1999

B. Bank Staff Assessments

C. Other

Preparation DocumentsAnhui Province Project Proposal Report, September 1998Fujian Province Project Proposal Report, October 1998Guizhou Province Project Proposal Report, September 1998Hainan Province Project Proposal Report, September 1998NPO Plans for Training and Allocation of PHRD Funding, November 1998NPO Feasibility Study Report, March 1999Anhui Province Feasibility Study Report, January 1999Fujian Province Feasibility Study Report, January 1999Guizhou Province Feasibility Study Report, January 1999Hainan Province Feasibility Study Report, January 1999County-level Feasibility Study Reports for all 27 project counties, January 1999Anhui Province Land Management Regulation, December 1992Fujian Province Land Management Regulation, August 1998Guizhou Province Land Management Regulation, September 1998Hainan Province Land Management Regulation, October 1997

*Including electronic files

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Annex 9: Statement of Loans and Credits

CHINA: Fourth Rural Water Supply and Sanitation Project

Difference between expectedand actual

Orginal Amount in US$ Millions disbursements

Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd

Number of Closed Projects: 106

CN-PE-3653 1999 PEOPLE'S REPUBLIC OF CHIN CONTAINER TRANSPORT 71.00 0.00 0.00 71.00 0.00 0.00

CN-PE-41B90 1999 PEOPLE'S REPUBLICOFCHIN LIAONINGURBTRANSP 150.00 0.00 0.00 150.00 0.00 0.00

CN-PE-49665 1999 PRC ANNING VALLEY AG.DEV 90.00 30.00 0.00 119.03 0.00 0.00

CN-PE-50036 1999 PEOPLE'S REPUBLIC OF CHIN ANHUI PROVINCIAL HWY 200.00 0.00 0.00 200.00 7.45 0.00

CN-PE-51856 1999 MINISTRYOF FINANCE ACCNTG REFORM &DEV 27.40 5.61 0.00 32.96 1.36 0.00

CN-PE-63123 1999 PRC YANGTZE FLOOD EMERGY 40.00 40.00 0.00 79.21 0.00 0.00

CN-PE-3539 1998 PRC SUST COAST RES DEV 100.00 0.00 0.00 96.00 -0.25 0.00CN-PE-3566 1998 PRC BASIC HEALTH 0.00 85.00 0.00 81.99 0.05 0.00

CN-PE-35698 1998 PRC HUNAN POWER DEVELOP. 300.00 0.00 0.00 300.00 9.00 0.00

CN-PE-3591 1998 GOC STATEFARMSCOMMERCI 150.00 0.00 0.00 102.59 -32.91 0.00

CN-PE-3606 1998 PEOPLE'S REPUBLICOF CHIN ENERGYCONSERVATION 63.00 0.00 0.00 63.00 2.87 0.00

CN-PE-3614 1998 MINISTRY OF FINANCE GUANGZ. CITY CRT.TRP 200.00 0.00 0.00 192.00 5.61 0.00CN-PE-3619 1998 CHINA 2ND INLAND WATERWAYS 123.00 0.00 0.00 123.00 18.50 0.00

CN-PE-36414 1998 PEOPLES REPUBLIC OF CHINA GUANGXI URBAN ENV. 72.00 20.00 0.00 88.83 -1.20 0.00

CN-PE-36949 1998 PRC NAT.HWY3-HUBEI 250.00 0.00 0.00 242.00 12.00 0.00CN-PE-40185 1998 PEOPLE'S REPUBLIC OF CHIN SHANDONG ENVIRONMENT 95.00 0.00 0.00 92.00 21.75 0.00CN-PE-45788 1998 PRC TRI-PROVINCIAL HWY 230.00 0.00 0.00 230.00 39.70 0.00

CN-PE-46563 1998 PRC TARIM BASIN II 90.00 60.00 0.00 140.76 5.11 0.00CN-PE-46952 1998 PRC FOREST. DEV. POOR AR 100.00 100.00 0.00 200.81 8.50 17.00

CN-PE-49700 1998 GOC IAIL-2 300.00 0.00 0.00 280.00 3.30 0.00CN-PE-51736 1998 PRC E. CHINA/JIANGSU PWR 250.00 0.00 0.00 250.00 92.38 0.00CN-PE-56491 1998 PRC HEBEI EARTHQUAKE 0.00 28.40 0.00 10.66 -9.81 0.00ON-PE-34081 1997 PRC XIAOLANGDI MULTI. 11 430.00 0.00 0.00 331.51 89.27 0.00CN-PE-3590 1997 PRC QINBA MTS. POVTY RED 30.00 150.00 0.00 148.35 23.88 0.00

CN-PE-3635 1997 PRC VOC. ED. REFORM PROJ 10.00 20.00 0.00 15.19 1.30 0.00

CN-PE-3637 1997 PRC NATLRURWATERIII 0.00 70.00 0.00 62.10 10.38 0.00CN-PE-36405 1997 PRC WANJIAZHAI WATER TRA 400.00 0.00 0.00 320.09 5.08 0.00

CN-PE-3643 1997 GOC XINJIANG HIGHWAYS 11 300.00 0.00 0.00 230.72 57.72 0.00CN-PE-3650 1997 PRC TUOKETUO POWER/INNER 400.00 0.00 0.00 394.61 137.17 0.00CN-PE-3654 1997 PRC HUNAN/GUANG HWY2-NH2 400.00 0.00 0.00 336.64 86.62 0.00

CN-PE-36952 1997 PRC BASIC ED. IV 0.00 85.00 0.00 41.37 -26.19 0.00CN-PE-38988 1997 PRC HEILONGJIANGADP 120.00 0.00 0.00 93.02 8.38 0.00CN-PE-44485 1997 GOC SHANGHAI WAIGAOCIAO 400.00 0.00 0.00 400.00 53.05 0.00CN-PE-34618 1996 PRC LABOR MARKET DEV. 10.00 20.00 0.00 24.00 22.16 0.00CN-PE-3507 1996 P.R.C. ERTAN HYDRO II 400.00 0.00 0.00 25.23 -22.55 0.00CN-PE-3563 1996 PRC ANIMAL FEED 150.00 0.00 0.00 138.78 110.45 18.79

CN-PE-3569 1996 PRC SHANGHAI-ZHEJIANG HI 260.00 0.00 7.75 110.73 32.49 22.50CN-PE-3589 1996 YUNNAN PROV. GOV. DISEASE PREVENTION 0.00 100.00 0.00 69.06 58.11 0.00

CN-PE-3594 1996 PRC GANSU HEXI CORRIDOR 60.00 90.00 0.00 125.65 26.19 0.00CN-PE-3599 1996 PRC YUNNAN ENVIRONMENT 125.00 25.00 0.00 139.13 18.15 0.00CN-PE-3602 1996 PRC HUBEI URBAN ENV. PRO 125.00 25.00 0.00 123.98 76.31 0.00CN-PE-3638 1996 SHANGHAI MUN. GOVT SEEDS SECTOR COMMER. 80.00 20.00 0.00 80.15 27.70 0.00CN-PE-3646 1996 CHINA CHONGQING IND POL CT 170.00 0.00 77.99 . 91.22 102.45 0.00

CN-PE-3648 1996 PRC SECONDSHANGHAISEWE 250.00 0.00 0.00 157.96 76.95 0.00CN-PE-3649 1996 PRC SHANXI POVERTY ALLEV 0.00 100.00 0.00 34.56 -8.05 0.00CN-PE-3652 1996 PRC 2ND SHAANXI PROV HWY 210.00 0.00 0.00 139.29 51.28 0.00

CN-PE-36950 1996 PRC BASIC ED. POOR III 0.00 100.00 0.00 11.93 -20.76 0.00

CN-PE-40513 1996 PRC 2ND HENAN PROV HWY 210.00 0.00 0.00 175.14 51.14 0.00CN-PE-3493 1995 INLAND WATERWAYS 420.00 0.00 0.00 275.02 -9.54 0.00

CN-PE-3571 1995 RAILWAYS VII 400.00 0.00 29.00 344.67 201.66 -2.97

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Difference between expectedand actual

Original Amount in US$ Millions disbursements

Project ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd

CN-PE-3585 1995 GOC SHENYANG IND. REFORM 175.00 0.00 0.00 97.54 49.74 0.00

CN-PE-3596 1995 PRC YANGTZE BASIN WATER 100.00 110.00 0.00 35.28 -12.19 0.00

CN-PE-3598 1995 PRC LIAONING ENVIRONMENT 110.00 0.00 0.00 70.21 58.65 0.00

CN-PE-3600 1995 PRC TECHNOLOGY DEVELOPME 200.00 0.00 0.00 125.74 43.65 0.00

CN-PE-3603 1995 MOF ENT. HOUSING SOC. SE 275.00 75.00 20.00 199.54 155.96 7.94

CN-PE-36041 1995 PRC FISCAL & TAX REF. & 50.00 25.00 0.00 66.31 41.61 0.00

CN-PE-3612 1995 PRC XINJIANG HIGHWAY I 150.00 0.00 0.00 47.85 37.86 0.00

CN-PE-3634 1995 PRC MATERNAL CHILD HEALT 0.00 90.00 0.00 18.42 8.84 0.00

CN-PE-3636 1995 PRC BASIC EDUC IN POOR & 0.00 100.00 0.00 3.39 -1.46 0.00

CN-PE-3639 1995 PRC SOUTHWEST POV. REDUC 95.00 200.00 0.00 143.78 32.70 0.00

CN-PE-3642 1995 GOC ZHEJIANG POWER DEvT 400.00 0.00 0.00 136.50 -44.02 0.00

CN-PE-3647 1995 PRC ECONOMIC LAW REFORM 0.00 0.00 5.51 5.59 0.00

CN-PE-36947 1995 MOH SICHUAN TRANSMISSION 270.00 0.00 0.00 132.50 119.80 80.99

CN-PE-37156 1995 PRC IODINE DEF. DISORDER 7.00 20.00 7.00 1.91 11.57 -0.19

CN-PE-3502 1994 PRC RUR HEALTH MANPOWER 0.00 110.00 0,00 29.62 24.07 0.00

CN-PE-3504 1994 PRC HEBEIIHENAN NATIONAL 380.00 0.00 0.00 48.65 15.63 0.00

CN-PE-3540 1994 PRC LOESS PLATEAU 0.00 150.00 0.00 27.96 -23.21 0.00

CN-PE-3557 1994 PRC FOREST RESOURCE DEV 0.00 200.00 0.00 40.47 13.01 -32.36

CN-PE-3562 1994 PRC XIAOLANGDI MULTIPURPOSE 460.00 0.00 0.00 0.83 0.83 0.00

CN-PE-3586 1994 PRC SHANGHAI ENVIRONMENT 160.00 0.00 0.00 62.73 57.29 0.00

CN-PE-3593 1994 GOC SONGLIAO PLAIN ADP 0.00 205.00 0.00 25.39 -12.80 0.00

CN-PE-3596 1994 SHANGHAI MUNICIPAL GOVT RED SOILS II DEVELOP 0.00 150.00 0.00 40.36 16.45 0.00

CN-PE-3609 1994 GOC SICHUAN GAS DEV & CONSERVATION 255.00 0.00 0.00 122.62 71.13 0.00

CN-PE-3622 1994 GOVERNMENT OF PRC SHANGHAI MTP II 150.00 0.00 0.00 7.36 7.37 0.00

CN-PE-3626 1994 PRC FUJIAN PROV HIGHWAY 140.00 0.00 0.00 58.63 36.62 8.35

CN-PE-3633 1994 PRC TELECOMMUNICATIONS 250.00 0.00 30.00 15.27 45.27 0.00

CN-PE-3641 1994 P.R.C. YANGZHOU THERMAL POW 350.00 0.00 0.00 74.09 57.77 0.00

CN-PE-3644 1994 GOVT OF PEOPLES REP. OF C XIAOLANGDI RESETTLEMENT 0.00 110.00 0.00 25.56 8.87 0.00

CN-PE-3473 1993 PRC ZHEJIANG MULTICITIES 0.00 110.00 0.00 19.79 19.17 0.00

CN-PE-3512 1993 PRC SHANGHAI PORT REST. 150.00 0.00 25.74 3.88 29.10 2.86

CN-PE-3518 1993 PRC GUANGDONG PROV. TRANSPORT 240.00 0.00 0.00 2.08 -0.94 0.00

CN-PE-3533 1993 PRC TIANJIN IND. II 150.00 0.00 40.35 13.59 44.43 7.93

CN-PE-3559 1993 PRC AGRIC. SUPPORT SERVI 0.00 115.00 0.00 10.41 -1.50 0.00

CN-PE-3561 1993 PRC SICHUAN ADP 0.00 147.00 0.00 5.49 0.00 0.00

CN-PE-3567 1993 PRC EFFECTIVE TEACHING S 0.00 100.00 0.00 9.59 7.96 8.04

CN-PE-3570 1993 PRC RAILWAY VI 420.00 0.00 0.00 94.61 93.62 0.00

CN-PE-3580 1993 PRC SO.JIANGSU ENVIRON. PROTECT. 250.00 0.00 0.00 4.15 -0.31 0.00CN-PE-3581 1993 PRC HENAN PROV. TRANSPORT 120.00 0.00 0.00 9.59 9.60 0.00

CN-PE-3592 1993 PRC REF. INsrL.& PREINV 0.00 50.00 0.00 18.47 18.48 0.00CN-PE-3597 1993 PRC TAIHU BASIN FLOOD CO 100.00 100.00 0.00 47.43 43.08 0.00

CN-PE-3816 1993 ROC TIANHUANGPING HYDRO 300.00 0.00 0.00 65.95 49.37 0.00CN-PE-3623 1993 PRC FINANCIALSECTORTA 0.00 60.00 0.00 19.16 16.21 0.00CN-PE-3627 1993 BEWING MUNICIPALITY GRAIN DISTRIBUTION P 325.00 165.00 0.00 325.46 322.19 86.20

CN-PE-3632 1993 R.O.C. ENVIRONMENT TECH ASS 0.00 50.00 0.00 10.71 11.06 0.03

CN-PE-3503 1992 ZOUXIAN THERMAL POWE 310.00 0.00 0.00 7.79 7.80 0.00

CN-PE-3534 1992 ZHEJIANG PROVTRANSP 220.00 0.00 0.00 . 19.91 19.92 12.42

CN-PE-3564 1992 BEIJING ENVIRONMENT 45.00 80.00 0.00 2528 20.02 8.32

CN-PE-3565 1992 SHANGHAI METRO TRANS 0.00 60.00 1.69 1.32 -0.08 0.00

CN-PE-3568 1992 TIANJIN URB DEV& EN 0.00 100.00 0.00 18.33 15.24 -2.50

Total: 14,868.40 3,866.01 239.62 9,983.25 2,97525 243.35

Active ClosedProjects Projects Total

Total Disbursed (IBRD and IDA): 8,558.59 12,529.50 21,088.09of which has been repaid: 73.75 2,515.23 2,588.98

Total now held by IBRD and IDA: 18,550.68 9,648.52 28,199.20Amount sold: 0.00 0.00 0.00

of which repaid: 0.00 0.00 0.00

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Total Undisbursed: 9,983.25 21.95 10,005.20Actual disbursements to date minus intended disbursements to date as projected at appraisal.

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CHINASTATEMENT OF IFC's

Held and Disbursed Portfolio31-Mar-i 999

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic0 Pacific Ports 0.00 0.00 3.64 0.00 0.00 0.00 3.64 0.00

1987/92/94 China Bicycles 8.50 0.00 3.39 0.00 8.50 0.00 3.39 0.001993 Shenzhen PCCP 3.76 0.00 0.99 0.00 3.76 0.00 0.99 0.001993 Yantai Cement 13.51 0.00 1.95 7.22 13.51 0.00 1.95 7.221994 China Walden Mgt 0.00 0.00 0.01 0.00 0.00 0.00 0.01 0.001994 China Walden JV 0.00 0.00 6.00 0.00 0.00 0.00 3.53 0.001994 Dalian Glass 20.50 0.00 2.40 40.50 20.50 0.00 2.40 40.501994 Dynamic Fund 0.00 0.00 12.35 0.00 0.00 0.00 10.08 0.001994/97 PTP Leshan 11.20 0.00 1.00 14.00 11.20 0.00 1.00 14.001995 Dupont Suzhou 23.36 0.00 4.15 46.80 23.36 0.00 4.15 46.801995 Newbridge Inv. 0.00 0.00 7.19 0.00 0.00 0.00 3.89 0.001995 Suzhou PVC 22.00 0.00 2.48 22.20 22.00 0.00 2.48 22.201996 Beijing Hormel 4.64 0.00 0.50 4.95 4.64 0.00 0.50 4.951996 Jingyang 40.00 0.00 0.00 100.00 40.00 0.00 0.00 100.001996 Nanjing Kumnho 15.03 0.00 3.81 42.73 12.66 0.00 3.81 35.981996 TianjinKurnho 11.17 0.00 0.00 33.00 0.00 0.00 0.00 0.001996 Weihai Weidongri 3.83 0.00 0.00 0.00 3.83 0.00 0.00 0.001997 Ningbo 0.00 0.00 2.00 0.00 0.00 0.00 2.00 0.001997 Orient Finance 13.33 0.00 0.00 16.67 13.33 0.00 0.00 16.671997 PTP Hubei 12.63 0.00 0.00 25.38 10.96 0.00 0.00 22.041997 Rabobank PTPC 2.40 0.00 0.00 2.40 0.00 0.00 0.00 0.001998 Caltex Ocean 21.00 0.00 0.00 45.00 16.23 0.00 0.00 34.771998 Chengxin-IBCA 0.00 0.00 0.36 0.00 0.00 0.00 0.00 0.001998 Leshan Scana 6.10 0.00 1.35 0.00 0.00 0.00 0.00 0.001998 Rabobank SHFC 2.75 0.00 0.00 2.75 2.25 0.00 0.00 2.25

Total Portfolio: 235.71 0.00 53.57 403.60 206.73 0.00 43.82 347.38

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic1998 CHENGDU CHEMICAL 7.40 3.20 0.00 8.601998 EURECA 0.00 3.00 0.00 0.001998 JIANGSU COLINE 6.50 0.00 0.00 0.001998 ORIENT FIN A INC 3.33 0.00 0.00 0.001998 SHANGHAI KRUPP 30.00 0.00 0.00 78.441998 WUHAN CIG 0.00 1.50 0.00 0.001998 WUHAN PORT 5.00 0.00 0.00 5.001998 ZHEJIANG COLINE 6.50 0.00 0.00 0.001998 XIB 50.00 20.00 0.00 0.001998 ZHEN JING 4.50 0.00 0.00 0.001997 CHINEFARGE 12.80 0.00 0.00 20.001997 NISSAN/DONGFENG 20.20 0.00 0.00 27.001997 SMC 14.00 0.00 0.00 14.001997 PTP HOLDINGS 0.00 1.50 0.00 0.00

Total Pending Conmmitment: 160.23 29.20 0.00 153.04

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Annex 10: Country at a GlanceCHINA: Fourth Rural Water Supply and Sanitation Project

East Lower. 1128/99POVERTY and SOCIAL Asia& middle.

China Pacific Income Development diamond1997Population, mid-year (millions) 1,227.2 1,753 2,282 Life expectancyGNP per capita (Atlas method, USS1 860 970 1,230GNP (Atlas method, USS billions) 1,055.4 1,707 2,818

Average annual growth, 1991-97

Population (%) 1.1 1.3 1.2 G GLabor force (I%) 1.1 1.4 1.3 GNP Gross

per primaryMost recent estimate (latest Vear available. 1991-97) capita enrollment

Poverty N% of poPulation below national poverty line) 7Urban population (% of total population) 32 32 42Life expectancy at birth (years) 70 68 69Infant mortality (per 1,000 live births) 32 38 36Child malnutrition (56 of children under 5) 16 16 .. Access to safe waterAccess to safe water (% of population) 90 84 84Illiteracy (% of population age 15+) 19 17 19Gross primary enrollment (% of school-age population) 120 118 114 - China

Male 121 120 116 Lower-middle-income groupFemale 120 119 113

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 19t6 1996 1997Econemic raties'

GDP (USS billions) 151.6 295.7 816.5 902.0Gross domestic investment/GDP 27.9 37.7 39.6 38.2Exports of goods and services/GDP 5.0 12.2 21.0 23.0 TradeGross domestic savings/GDP 28.5 35.2 41.7 42.7Gross national savings/GDP 28.5 35.3 40.4 41.4

Current account balance/GDP 0.2 -2.5 0.9 3.2 _mtInterest payments/GDP .. 0.2 0.6 0.6 DomesticmentTotal debt/GDP .. 8.0 15.8 16.3 Savings Ie nTotal debt servicelexports .. 9.6 8.7 8.6Present value of debt/GDP .. . . 14.9Present value of debUexports .. . 62.7

Indebtedness1976-86 1987-97 1996 1997 1998-02

(average annual growth)GOP 9.3 10.1 9.6 8.8 -ChinaGNP per capita 8.3 8.6 8.7 7.4 .Lower-middle-income groupExports of goods and services 18.8 16.6 5.6 27.6

STRUCTURE of the ECONOMY1976 1986 1996 1997 Growth rates of output and investment (%)

(% of GDP) 35Agriculture 32.8 27.1 20.4 18.7Industry 45.4 44.0 49.5 49.2 20

Manufacturing 29.5 35.5 37.8 37.3 1

Services 21.7 28.9 30.1 32.1 i

Private consumption 64.0 51.4 46.7 45.7 92 93 94 95 95 97General government consumption 7.5 13.4 11.6 11.6 G -*--GDPImports of goods and services 4.5 14.7 18.9 18.5

1976-86 1987-97 1996 1997 Growth rates of exports and imports (%)(average annual growth)Agriculture 6.0 4.4 5.1 3.5 40Industry 11.0 13.8 12.1 10.8 30

Manufacturing 12.8 13.3 11.6 9.9 Services 12.0 8.7 7.9 8.3 20X

Private consumption 9.3 8.8 11.1 6.2General government consumption 9.4 9.9 9.5 8.2 oGross domestic investment 10.8 11.2 8.2 5.6 92 93 94 95 95 97

Imports of goods and services 22.5 12.8 5.9 13.1 - Exports e ImportsGross national product 9.8 9.9 9.8 8.5

Note: 1997 data are preliminary estimates.This table was produced from the Development Economics central database.

The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

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China

PRICES and GOVERNMENT FINANCE1976 1986 1996 1997 Inflation (%)

Domestic prices(% change) 30Consumer prices 6.5 9.4 7.9 20Implicit GDP deflator 4.0 4.6 5.9 1.2 15J

Government finance(% of GDP, includes current grants) DCurrent revenue .. 24.0 11.4 12.0 92 93 94 95 96 97Current budget balance .. 5.6 0.6 0.6 - GDP deflator CPIOverall surplus/deficit .. -1.8 -1.5 -1.5

TRADE1976 1986 1996 1997 Export and import levels (US$ millions)

(US$ millions)Total exports (fob) 30,942 151,066 182,696 200,000

Food .. 4,448 10,232 11,054Fuel .. 3,683 5,929 6,987 150,00lManufactures .. 19,670 129,141 158,767

Total imports (cif) .. 42,904 138,838 142,361 500,00_Food .. 2,002 7,866 6,308 s uouDoFuel and energy .. 504 6,877 10,306Capital goods .. 20,415 59,610 57,930 o

Export price index (1995=100) .. 66 ..Import price index (1995=100) .. 69 . Exports UlmportsTerms of trade (1995=100) .. 96

BALANCE of PAYMENTS1976 1986 1996 1997 Current account balance to GDP ratio

(US$ millDons)

Exports of goods and services 7,383 29,583 171,700 207,253 4TImports of goods and services 7,125 37,472 154,100 166,755Resource balance 258 -7,889 17,600 40,498 2U

Net income 0 176 -12,370 -15,900Net current transfers 0 255 1,922 4,660 D

91 92 94 95 90 97Current account balance 258 -7,458 7,152 29,258

Financing items (net) .. 5,410 28,248 6,599Changes in net reserves .. 2,048 -35,400 -35,857 ^

Memo:Reserves including gold (USS millions) .. 16.417 111,728 146,448Conversion rate (DEC, locallUSS) 1.9 3.5 8.3 8.3

EXTERNAL DEBT and RESOURCE FLOWS1976 1986 1996 1997

(US$ millions) Composition of total debt, 1997 (US$ millionsTotal debt outstanding and disbursed .. 23,719 128,817 146,697

IBRD .. 965 7,616 8,239 A: 8,239IDA .. 774 7,579 7,830 G: 31,464 B: 7,830

Total debt service .. 2,974 15,756 18,445 D: 2,904IBRD .. 66 840 858IDA .. 8 73 81 E 20,782I-

Composition of net resource flowsOfficial grants .. 155 249 228Official creditors .. 1,165 4,401 4,315Private creditors .. 3,693 6,454 8,134Foreign direct investment .. 1,875 40,180 44,236Portfolio equity .. 0 3,466 8,457 F: 75,478

World Bank programCommitments .. 1,120 1,900 2,425 A - IBRD E - BilateralDisbursements .. 607 2,097 2,275 B - IDA 0 - Other multilateral F - PrivatePrincipal repayments .. 0 364 377 c - IMF . G - Short-ermNet flows .. 607 1,734 1,898Interest payments .. 75 549 562Net transfers .. 532 1,185 1,335

Note: This table was produced from the Development Economics central database. 1/28199

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MAP SECTION

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